Rising inflation, mediocre wage gains temper retail forecast as economy
muddles through post-Carney era
TORONTO, March 12, 2014 /CNW/ - Retailers in Canada are expected to sell
less this year but at higher prices, reflecting rising energy costs and
a weaker dollar, amid lacklustre wage and employment growth as Canada's
economy strives to find its footing, says a new report from CIBC World
"We will see a complete U-turn from what we saw last year, in which
retailers moved greater volumes as consumers' purchasing power
benefited from softer inflation," says Avery Shenfeld, Chief Economist
at CIBC. "The next two years will see a gradual upturn in inflation, in
part a reflection of a weaker Canadian dollar but also capturing higher
energy costs and a tobacco tax hike. So, quarterly growth rates (in
retail sales) will see a trend towards selling less for more: higher
prices, but leaner growth in real volumes."
The one constant is that relatively flat wage and employment gains in
2013 translated into mediocre growth in Canadians' household wallets,
he says. In nominal terms, disposable income growth has been slowing,
rising by only 3.6 per cent last year, the weakest non-recessionary
showing since 1996, the report finds.
"Improvements on that front aren't likely to be seen until 2015, when
tighter job markets should generate some labour bargaining power," says
Mr. Shenfeld, noting that typically average hourly wages don't climb at
anything above 3 per cent unless the output gap - the difference
between the economy's actual and potential output --- has been closed.
Income patterns help to explain the appeal of dollar, or bargain,
stores, which have been the big winners in the retail space, he says.
Increasingly, wage gains have been tilted to a select group of
higher-paid sectors, says Mr. Shenfeld. The average wage in the past
year rose 2.5 per cent but the median wage climbed only 1 per cent,
extending a more than decade-old pattern in which the ratio of the
average-to-the-median wage has been widening, he says.
Wage gains in higher-paid sectors may bode well for the expected
upcoming boom in the luxury-store market from U.S. retailers moving
north, but Mr. Shenfeld remains cautious. "They still risk
disappointments in the size of that segment relative to where it sits
on their more familiar U.S. turf," he says. "Despite a rising trend in
(wage) inequality over prior decades, both pre- and after-tax income in
Canada is not nearly as unevenly distributed as it is stateside."
While a surprise drop in inflation last year helped to lift consumers'
spending power Mr. Shenfeld expects the reverse this year, as inflation
gradually climbs to 2 per cent.
"The good news for retailers is that history suggests that consumer
credit growth is unlikely to slow any further in real terms without
being pushed there by a recession," he says.
He notes that the growth in consumer credit is near its lowest pace in
more than two decades, indicating that Canadians have been listening to
those advising more caution in taking on debt. "Despite all the fear
mongering about rising debt/income ratios being a reflection of
profligate behaviour in a low-rate environment, the debt burden climb
in the last two years has been largely a story of soft incomes and
mortgage credit, not borrowing for consumption," he says.
Still, savings decisions could still pinch consumption a bit, he says.
In a section of his report, What Carney Left Behind, Mr. Shenfeld says
the decision by former Bank of Canada Governor Mark Carney to take a
"hands-off attitude on the exchange rate, alongside foreign central
bank intervention, contributed to a serious overvaluation of the
Canadian dollar. The country is in reasonable overall shape, but is
still struggling to wean itself off home building as a source of
The Bank of Canada chose to keep interest rates low to stimulate housing
and domestic consumption as an offset to the drag on exports from the
stronger Canadian dollar, rather than intervene, as the Swiss did, to
neutralize the impact of hot money capital inflows on the exchange
"In effect, monetary and exchange rate policy traded off more condos for
fewer factories," says Mr. Shenfeld.
CIBC is paring its 2014 forecast for Canada's economy after dropping its
outlook for investment spending based on the latest intentions survey
from Statistics Canada that showed almost no growth in capital spending
from the business sector this year.
"We've reduced our investment spending call enough to pare our 2014 GDP
growth forecast by two ticks, to 2.1 per cent" from 2.3 per cent, says
Mr. Shenfeld. "The trimming would have been larger if not for signs
that housing construction, including completions of the forest of
condos underway, will remain a growth contributor for one more year."
While exports in January were likely hurt by weather-related
transportation bottlenecks, the prior trend was still "uninspiring,"
with exporters failing to capitalize much on a fairly healthy
second-half growth pace in the U.S.," he says.
Even though the Canadian dollar is now "more appropriately valued" and
commodity prices are improving, helping "to bring trade into better
balance," Mr. Shenfeld says that "the legacy of earlier plant closures
will be with us for several years to come."
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eimar14.pdf
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SOURCE: CIBC World Markets
For further information:
Avery Shenfeld, Chief Economist, at 416-594-7356, firstname.lastname@example.org; or
Kevin Dove, Communications and Public Affairs at 416-980-8835, email@example.com