By Bitwave 
Consumer spending is expected to cool in the third quarter as interest rate hikes continue to work their way through the economy, experts said.
‘We Expect Consumers Will Be Under Increasing Strain’
"We do expect that consumers will be under increasing strain, particularly those folks that are borrowing," said Stephen Tapp, chief economist at the Canadian Chamber of Commerce. "They have to service their debt, they’re going to have to cut back on something, and they’ll be cutting back on discretionary spending."
Discretionary Spending Expected to Decline
Consumer spending will likely slow noticeably in the second half of the year as people cut back on discretionary purchases, said Tapp. The chamber tracks local spending using data from payments firm Moneris. Its business data lab found that while consumer spending remained strong in the second quarter, it is expected to decline in the third quarter.
Population Growth Supporting Strong Spending
Tapp said population growth has been supporting strong spending. While spending tracked by the chamber is up from last year, when adjusted for inflation and population growth, real spending growth per person has actually been negative since mid-March.
Consumers Still Working Through Pent-Up Demand
Consumers are still working through some pent-up demand from the pandemic, said Freestone, with travel and restaurants still top priorities for many. Restaurant spending has been higher even when adjusted for inflation despite higher menu prices, she said.
Central Bank Aims to Slow Growth
The central bank is looking for slower growth to help it reach its target of two per cent inflation, said Tapp, and that includes slower spending growth. "That’s the sort of balancing act they’re trying to make, where they want to slow the economy so that supply can catch up to demand, but they don’t want to slow it so much that we have people losing their jobs and we have an actual broader recession," he said.
Consumer Confidence Decreased in June
Consumer confidence decreased in June after several months of gradual increases, according to the Conference Board of Canada, with future job prospects trending negative. "If expectations have now changed from a stable future to one of further possible hikes, consumers could overcompensate with exceptionally restrained spending, leading to a downward spiral of consumer confidence," the Conference Board said in a report Thursday.
Experts Predict Decline in Real Per Capita Spending
Real per capita spending, or spending adjusted for inflation and population growth, will likely see a decline in the third quarter, said Freestone, noting that some of the lagging effects of rate hikes will continue to hit as mortgages come up for renewal in the summer and fall.
Experts’ Views on Rate Hikes
- "I’m surprised if the Bank of Canada continued to raise rates," said an expert.
- "Inflation forces Canadians cancel vacation plans: Leger," reported another expert.
- "Food to cellphone bills: 5 things to know about June inflation data," said yet another expert.
Conclusion
Consumer spending is expected to decline in the third quarter as interest rate hikes continue to work their way through the economy, experts said. The central bank aims to slow growth to reach its target of two per cent inflation, but it does not want to slow it so much that people lose their jobs and there is an actual broader recession.