Canada: consumer mood swing affects economy

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Ottawa Citizen

Consumer mood swing in economic uncertainty makes things worse, experts say

PAULA ARAB

TORONTO (CP) - Don't panic. The fear of a worsening economy is good reason to think twice about where to spend your money, but if consumers come to a screeching halt - even when they can afford a purchase - a recession becomes more likely, experts say. With glaring headlines of hard times ahead in the United States and a likely income squeeze that could spill over into Canada, industry watchers are scrambling to give a positive spin on the recent wave of bad news.

One ray of light from the dramatic cut in U.S. interest rates this week by the Federal Reserve Board is that borrowing costs across North America are heading lower.

That means it will be cheaper to buy a house, finance a new car purchase or arrange a line of credit. For businesses, it will cost less to borrow money for expansion.

"If the person is reasonably comfortable or confident in their job, this is not a bad time to be buying a house," said Douglas Porter, a senior economist at BMO Nesbitt Burns.

"Mortage rates are quite reasonable and the outlook for the housing market still looks quite good. . . It's not as if we've had an explosion in (housing) prices over the last 10 years such as we saw in the 1980s, so I'd hardly say real estate has become wildly over-valued."

Porter, who advises consumers to remain cautious and keep their investments diversified, said export-geared sectors such as the auto industry will feel the most pain from the recent U.S. slowdown.

Other large companies will likely scale back expansion plans and small start-up companies could face bankruptcy.

In a move that may revive consumer confidence about the housing market, Canadian banks lowered their mortgage rates Wednesday just as the U.S. central bank said it would cut a key interest rate by half a percentage point.

Further Fed cuts of up to half or three-quarters of a point are expected over the next several months to prevent a rapid decline in the U.S. economy and boost stock market confidence.

While the latest December figures suggest Canadians are still fairly confident about the economy, the numbers are likely outdated due to the speed with which signs of trouble in the U.S. have appeared, said Porter.

Worries of an economic slowdown in the U.S., and its subsequent spillover effect on Canada, have escalated in recent months.

High-profile plant closures and job cuts, corporate profit warnings, a sagging auto industry and trouble in the high-tech sector have worsened the fears and given the stock markets a beating in recent weeks. And a U.S. report this week showed manufacturing levels in December had hit a near-decade low.

The dramatic rate cut Wednesday by the U.S. Federal Reserve - rare in that it occurred between meetings of the central bank's policy-setting committee - was a loud wakeup call.

"There's no question we've been inundated here with scare headlines about how much the U.S. is weakening," said Porter.

But fear and finances are the worst combination, warns Jennifer Hillard, vice-president of the Consumers' Association of Canada.

"Obviously, we don't want to encourage people to overextend themselves but we don't want consumers to panic and make the recession - if there's going to be one - worse than it needs to be," said Hillard, who's based in Winnipeg.

Her advice to consumers is to monitor their debts with an eye on where they can cut spending. While banks don't tend to advertise low-interest credit cards, most make them readily available and now would be a good time to get one, she said.

If renewing a mortgage at a lower rate, consumers should set aside the extra money to use as a buffer for unusual expenses such as high heating bills this winter, said Hillard.

"Home heating costs are just going through the roof. I don't see any way that that's either going to stop or come down," she said, adding that fuel costs should be considered when buying a house or vehicle.

With a colder and earlier winter than normal, the next few months will be difficult on Canadians as relief from income tax cuts and lower borrowing costs will take time to work their way into consumers' pockets.

And RRSP season is here, a time when many people are usually scrambling to top up their retirement savings plans before the end-of-February deadline.

According to an Ipsos Reid survey conducted for the Royal Bank, Canadians are set to contribute 11 per cent less to RRSPs than a year ago.

The annual report, which surveyed 1,202 people from Nov. 9 to Nov. 19, found the average contribution would be $4,490, versus $5,051 a year ago.

But John Murray, vice-president of corporate affairs for the Investment Funds Institute of Canada, said Canadians put $373 million of new money into mutual funds in November, an increase of 23 per cent from the previous month.

"We've seen some hiccups (in the economy) but nothing serious."

-- Rachel Gibson (rgibson@hotmail.com), January 04, 2001


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