House Chief Economist Stephen Tapp forecast consumer spending will slow significantly in the second half of the year as people cut back on consumer goods.

“We expect consumers to come under increasing pressure, particularly those who are borrowing,” he said. They have to pay off their debt, they have to cut back, and they’re going to cut back on their discretionary spending.

CCC tracks local spend using data from payments company Moneris. The trade data lab noted that consumer spending picked up in April and May after the post-holiday lull.

“It’s true that the second quarter was really good. Just like the first quarter was really good,” said Mr. Tapp.

However, they started falling in June after the Bank of Canada raised interest rates to 4.75%, the CCC observed.

Last week, the central bank raised interest rates again to 5.00%.

The central bank would like slower growth to help it fight inflation aimed at bringing it back to its 2.0% target, Tapp said. In particular, this requires a slowdown in expenditure growth.

“That’s the kind of balance they’re trying to achieve. They want to slow down the economy so supply can keep up with demand, but they don’t want to slow it down enough that people lose their jobs and we end up with a broader recession,” he noted.

Mr. Tapp pointed out that population growth has supported strong spending. If the spending monitored by the chamber is increasing year-on-year, since mid-March it has shown a decline when adjusted for inflation and population growth.

This helps explain why consumer spending has remained strong even as Canadians have cut spending to meet rising costs, Tapp continued.

“Overall, the economy continues to develop at a reasonable pace. But the average person, the average consumer, may feel like this isn’t a good time, even if it’s not necessarily a recession,” he noted.

Consumer confidence fell in June after several months of gradual increases, the Conference Board of Canada said amid a negative job outlook.

Services more popular than goods

Canadians were more likely to spend on discretionary services than goods in the second quarter, according to a study by RBC Economics.

Per capita spending has been weaker than total spending estimates suggest because of strong population growth, Royal Bank economist Carrie Freestone wrote in a July 13 report.

But consumer spending remained more robust in the second quarter than many feared, she continued.

“I think that the fact that we’re starting to see weakness in discretionary assets is probably a harbinger that rate hikes are starting to have an impact,” Freestone said in an interview.

“So I think that’s going to have an impact on the service sector at some point. We just haven’t seen it yet.

Ms Freestone noted that consumers were still grappling with pent-up demand from the pandemic, with travel and restaurants still being top priorities for many. Spending at restaurants has been higher, even adjusted for inflation, despite higher menu prices, she said.

“Canadians are willing to spend a little more money on restaurants or excursions, which are experiences they couldn’t have during the pandemic lockdown,” Ms Freestone noted.