OTTAWA - Canadian consumers appear to have their "mojo" back, and if all goes according Bank of Canada governor Mark Carney's plan, they'll be the key to Canada's economic rebound.
"Consumer demand is going to be at the heart of this recovery," Carney said at a news conference in Ottawa on Thursday following the release of the bank's quarterly monetary policy report.
Carney foresees consumer spending expanding considerably, helping to lift the economy from the depths of the recession in the second half of this year and fuelling growth of three and 3.3 per cent in 2010 and 2011, respectively.
The housing market has been a central facet of this domestic recovery, as record low borrowing costs have driven a strong resale market. Carney acknowledged that dynamic has "raised some concerns" at the central bank, although he resisted attempts to label it a possible bubble.
Equally supportive of Carney's outlook is a robust retail market that delivered results Thursday far surpassing expectations. Retail sales rose at twice the pace economists were projecting, up 0.8 per cent to $34.5 billion, thanks to higher gasoline and auto sales.
"This was a positive report, and it suggests that Canadian consumer spending may have regained its mojo in August, following the disappointing decline in July," exclaimed TD Securities economics strategist Millan Mulraine.
Further, said CIBC economist Krishen Rangasamy, "the strong retail numbers will add to the growing evidence that the domestic side of the Canadian economy is recovering.
"The monthly increase in retail volumes will, however, be offset by earlier-reported declines in manufacturing and wholesaling, suggesting a roughly flat GDP for August."
Carney warned that Canada's high dollar - which has soared almost 25 per cent in the past eight months and closed Thursday at 95.44 cents U.S. - will be a "drag" on the affairs of manufacturers and exporters, and cause net exports to fall one per cent in 2010.
Although the bank expects the housing market to cool in 2010, further risks lie in the possibility of record low rates driving consumers to take on more mortgage and other debt than they can handle, economists warn.
"There is a breaking point," said Sal Gauteri, senior economist at BMO Capital Markets.
"We're now at household debt ratios just above 100 per cent of personal income whereas the Americans are at about 110 per cent, so we're not quite there yet. But household credit is rising faster than family incomes and we know we can't continue that forever."
In the meantime however, the bank has pledged conditionally to keep overnight lending rates at a record low 0.25 per cent to the middle of next year. Also contributing to domestic demand will be Ottawa's two-year, $46.6-billion stimulus scheme.
The Bank of Canada said its forecast ultimately hinges on the resumption of growth in the global economy and the firming of commodity prices, as well as consumer spending that will fuel half of an expected 3.4 per cent gain in domestic demand in 2010.
It received good news on that front Thursday from the Conference Board of Canada, which declared in its autumn global outlook that the world is now emerging from the recession of 2008-09. The board now forecasts the world economy will grow by 2.6 per cent in 2010 after declining 2.3 per cent in 2009.
© The Financial Post - Oct 23, 2009