Why we can't stop spending

What happened to the New Consumer's devotion to thrift? Ignorance, temptation and Mark Carney.

(Photo: Richard B. Levine/Newscom)

The ‘New Consumer’

Remember the ‘New Consumer?’ This time last year, Canadians were deluged with accounts of a mythical new creature lurking the streets. This reformed individual avoided restaurants, preferring to buy groceries and brown-bag lunches. She spurned Cineplexes, opting for rentals, instead. She favoured private labels over name brands. Her next car — a long way off, mind you — would be a hybrid econobox even Europeans would approve of. Most important, she diligently stashed her new-found surplus dollars in a savings account, or paid down her sizable line of credit. She stopped short only of wearing a hair shirt.

‘With the Canadian economy in recession, it is of no surprise the period characterized by consumerism has ended,’ wrote Diana Petramala, an economist at TD Financial Group, in a May 2009 report that conveyed the spirit of the time. She declared a ‘shift to thrift’ underway.

Such predictions seemed sensible. Had we not witnessed Americans, Britons, Icelanders, Greeks and others endure jarring lifestyle adjustment? Foreign misfortunes afforded Canadians a vivid lesson on the hazards of debt-fuelled excess, one we apparently didn’t sleep through. In surveys, Canadians consistently declared themselves hell-bent on frugality. Take an April 2009 survey conducted for advertising agency Bensimon Byrne, released just after the Canadian economy hit rock-bottom. Respondents seemed shell-shocked: 81% agreed or strongly agreed that they had already cut back, and ‘most Canadians anticipate even further reduced spending over the next 12 months,’ its authors reported. ‘A culture of ‘thrift’ has emerged.’

With the benefit of hindsight, we see that culture never materialized. The Great Recession has been followed by the Great Incongruity, an era in which most of us loudly resolve to scrimp, while largely sticking to our pre-recession habits. Consider the evidence.

Canadians cut spending only mildly, and briefly. During the recession we spent less on discretionary or other easily postponed items, among them art, antiques, sports gear, snowmobiles and photographic equipment. Gordon Hendren, president of marketing research firm Charlton Strategic Research, observed a marked increase in comparison shopping among low- to mid-income earners.

But this isn’t frugality: Statistics Canada reports our non-tax spending fell just 0.7% in 2009. (The same year, the stricken British slashed fundamental costs like clothing, transport and housing, bringing household spending down 3.4%.) Our spending surged back last year to new records, with booze, specialty foods, minivans and pickups among the prime beneficiaries. The growth trajectory seems the same as before the recession.

Granted, Canada enjoyed falling unemployment, recovering asset prices and a resilient banking system. Yet ‘the recent surge in spending is not backed up by rising consumer fundamentals,’ observed CIBC economist Benjamin Tal last year, adding it ‘has actually coincided with a drop in the ability of households to spend.’ The New Consumer looks a lot like the old one, only worse.

Savings increased only modestly. Back when Canadians really were frugal — in the early 1980s — they saved as much as 20% of their disposable incomes. However, the household savings rate has been in decline for a generation. It meandered between 2% and 4% in the five years leading up to the recession. Following the recession, we began saving more, and the rate averaged a smidgen above 4% over the past four quarters.

But again, this isn’t frugality. Actually, we now save less of our incomes than Americans — not exactly Earth’s most austere residents. And Roger Sauve, a consultant who performs annual assessment of household finances for the Vanier Institute, says it’s hard to reconcile conflicting statistics. ‘If you look at things you can actually get numbers for, like RRSP contributions, those have gone down,’ Sauve notes. ‘Fewer people are doing it, and the average contribution is down.’

Citizens acknowledge they haven’t rediscovered savings religion: in October, an Ipsos Reid poll for RBC found that more than one-third of Canadians were saving less than they had in the past, versus 19% who claimed to be saving more. The Certified General Accountants Association of Canada (CGA-Canada) reports that one-third of non-retired Canadians save nothing, not even for retirement.

Canadians piled on debt. In past recessions, Canadians did the sensible thing: however briefly, they stopped accumulating debt and tossed some money to creditors. Americans and Brits are doing that now. But not us. We continue racking up debt, albeit more slowly than before. Over the past 20 years, Canadian households have more than doubled their ratio of debt to disposable income (a key measure of leverage relative to their ability to pay). It’s now at a record of 148%.

This deterioration is partly because, recession be damned, Canadians kept buying stuff. But ‘while growth rates of mortgages slowed over 2008-2009,’ CGA-Canada reported last May, ‘the pace of expansion of consumer credit accelerated.’ We’re talking credit cards, auto loans, lines of credit. Much of it went to renovations and new vehicles.

‘Consumer spending in the last two years was by far the most leveraged in recent history,’ CIBC economists observed recently. The list of individuals and organizations losing sleep over household debt — the government, bond-rating agencies, senior bank executives, economists — is long and growing. And according to a poll by RBC last March, 27% of ordinary Canadians ‘are up at night worrying about paying off their debt.’

Many of these aggregated statistics gloss over important variances across provinces, incomes and age groups. But the salient point is this: Canadians have done precisely the opposite of what they said they’d do. This phenomenon will help determine this country’s economic prospects in the years ahead. That’s because widespread financial mistakes by households can quickly spill over into the broader economy. While Canada is not so dependent as our southern neighbour on the length of the cash line at Walmart, consumer spending nevertheless consistently accounts for 55% of our gross domestic product.

Tomorrow, in part two of our four-part series ‘Why we can’t stop spending,’ we look at behavioural factors that affect spending impulses and how Canadians spend what money they do have.