At the start of the year, predictions were made about the North American economy, specifically about the divergence between the United States and Canada due to their differing mortgage markets. In Canada, a large number of borrowers have variable rate mortgages or loans that reset every 5 years, whereas in the US, 90% of borrowers have 30-year fixed rate mortgages. This difference in mortgage types is now causing a significant underperformance of the Canadian economy, particularly in consumer spending.
Evidence of this underperformance was recently seen in Canadian Tire, a local Wal-Mart competitor that offers various products including clothing, party supplies, and sporting goods. The company withdrew its forecast, blaming discretionary spending for the decline. The 10 interest rate hikes in less than 18 months, along with inflation and reduced savings, are causing financial strain for Canadian consumers. As a result, they are making tougher spending decisions and experiencing a change in household spending habits. The discretionary softness is more noticeable in heavily indebted households, especially in Ontario and British Columbia, which are the most overstretched housing markets in Canada.
Another indication of the economic impact is seen in Canadian mattress retailer Sleep Country, which also lowered its forecasts due to profitability pressure from new acquisitions and softer demand in Canada for the remainder of the year.
The Canadian dollar has also been softening, despite higher oil and gas prices. The decline in the currency, along with summer malaise, has concealed some of the headwinds facing the loonie. It is predicted that the Bank of Canada will pivot to a clear neutral stance and eventually announce a shift towards rate cuts, as the final rate hike was deemed a mistake. In light of this, it is expected that the USD/CAD exchange rate will reach 1.3950 or 1.4000.
This decline in consumer performance is not limited to Canada, as similar deteriorations are expected in Australia, New Zealand, the UK, and parts of Europe.
