Consumer spending, that engine of growth, is weaker than most people realize and that could get ugly for the economy, warns a CIBC economist this week.

Senior economist Andrew Grantham says the volume of spending in this country, on a per-person basis, is well below pre-pandemic levels and nearing levels seen only in recessions.

Aggregate consumer spending adjusted for inflation has risen almost 2 per cent since the second quarter of 2022, but much of this was driven by Canada’s spike in population.

“In per-capita terms, the decline in consumer spending since 2022 is already approaching levels consistent with prior recessions, and further weakness is expected during the first half of this year,” said Grantham.

The good news is about half of this decline is because households are saving more. The savings rate, which fell to 0.6 per cent of income in 2018 and then spiked during the pandemic, has settled at about 5 per cent, he said.

Mind you, this “newfound prudence,” which is especially evident in younger Canadians, may be born of necessity. Canadians under 35 have to save more for a down payment on a home because of high interest rates and property prices, he said. Canadians aged 35 to 45 may have bought their first home during the pandemic and now face a steep rise in mortgage payments.

“Unfortunately, the increase in savings, alongside the impact of high inflation and rising interest rates, has already resulted in a level of consumer spending that is weaker than many people realize,” said Grantham.

There are already signs that weakness is costing jobs. Employment in retail, restaurants, hotels and other personal services has been trending lower in recent months after only just hitting pre-pandemic levels in mid 2023, he said. This risks becoming a “vicious circle” of lower spending and further job losses.

But the “really ugly story” could come over the next few years amid the wave of mortgage renewals.

The problem is households who bought during the pandemic at the height of prices and low interest rates have seen less income growth than those who bought earlier.

“If interest rates don’t come down far enough, there is still a risk that consumer insolvencies will spike, and the economy falls into a recession,” Grantham said.

Markets expect the Bank of Canada to gradually cut rates to just over 3 per cent by 2026, but CIBC believes it will take more than that.

“The Bank of Canada will … need to carefully manage cutting interest rates early/deep enough to mitigate these risks,” he said.

“We suspect that this will involve interest rates needing to be lower by 2025 than financial markets currently expect.”

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When interest rates rise, commercial real estate gets hit twice. Higher borrowing costs depress prices and slowing economic activity reduces demand.

Challenging at any time, this cycle has been particularly bad, shows this chart from the International Monetary Fund.

Commercial property prices in the United States, the world’s largest market, have fallen 11 per cent since the Federal Reserve began hiking rates in 2022, wiping out the gains of the two years before.

One reason for the drop is rate hikes were unusually steep this time round. Another is the added blow to demand from the remote-work trend that continued after the pandemic.

Now more trouble could be on the horizon as high volumes of refinancing are coming due, said the IMF. An estimated $1.2 trillion of commercial real estate debt in the United States is maturing in the next two years, according to the Mortgage Bankers Association, and about 25 per cent of that is loans in the office and retail segments.

Smaller banks in the United States face the biggest risk because they are almost five times more exposed to the sector than larger banks.

“Rising delinquencies and defaults in the sector could restrict lending and trigger a vicious cycle of tighter funding conditions, falling commercial property prices, and losses for financial intermediaries with adverse spillovers to the rest of the economy,” warned the IMF.

• The Association of Mineral Exploration hosts its annual industry conference in Vancouver
• Cineplex Inc. and the Competition Bureau will meet for mediation today. The competition watchdog has alleged the theatre chain is misleading customers by adding an online booking fee for customers purchasing tickets through Cineplex’s website and app.
• Earnings: CN Rail, Netflix, GE, Procter & Gamble, Verizon, 3M
• Get all of today’s top breaking stories as they happen with the Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.

• What the Bank of Canada should be paying attention to
• OSC’s top enforcement official to leave at end of February
  

Cash is always king at times of market anxiety, particularly last year when it delivered its best returns in a generation thanks to the rapid ascent of interest rates. But strategists are now banging a different drum: cut the cash and stretch into longer-term bonds and equities, even if previous efforts at that last year proved painful. That cash you have stashed away is about to earn lower and lower returns.

Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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