| The Canadian economy is expected to experience softer economic growth as it weathers the U.S. housing crisis and continuing fi nancial turmoil in international markets. Many of the positive conditions that have stimulated Canada's domestic economy over the past few years should remain, with many analysts believing domestic demand will be the driver of the Canadian economy — as long as employment levels stay steady or rise, consumers will feel confident and continue to shop. Despite the fact that some financial institutions may currently be taking a hit, the outlook for corporate profi ts is bullish, creating favourable conditions for business investment.
In general, provinces with stronger manufacturing bases, such as Quebec and Ontario, will experience consumer demand below the national average, while Saskatchewan will again be the growth leader. The regional disparity in Canadian consumer demand will likely persist throughout the year, as still-strong commodity prices support growth across most of the West, while a deteriorating manufacturing sector continues to plague Central Canada.
Retailers in most provinces will see slower growth this year, but Ontario and Quebec will face the brunt of the weakness as higher energy costs, a strong Canadian dollar and a likely U.S. recession drag GDP growth in these provinces below 1%. Atlantic Canada should see sales growth at or ahead of the national average, thanks to an economy driven by a strong labour market, oil, and remittances from out West.
Consumer Spending to Remain Strong
Over the last few years, strong household spending has contributed to Canada's robust economic growth. The Conference Board of Canada expects that in 2008, and to a lesser extent in 2009, strong consumer expenditures will help the country maintain economic growth.
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Reductions in interest rates and last fall's federal tax cuts should help Canadians continue their recent shopping spree. Led by strength in purchases of semi-durables, services, and non-automobile durable goods, real consumer expenditures are expected to grow by 3.5 per cent this year. Next year, slower growth in income will lead to a deceleration in consumer spending, with real growth of 3.1 per cent anticipated.
Consumer price pressures are expected to ease further in the coming months as a number of forces work together to signifi cantly lower consumer price inflation to just 1.3 per cent this year. These forces include the high Canadian dollar, moderating nearterm GDP growth and softer commodity prices.
A Stronger Dollar Here to Stay
A strong appreciation of the Canadian dollar over the past four years has meant costs have decreased for many retailers that import goods priced in U.S. dollars, but retailers that buy imported goods from Canadian suppliers have not seen all the benefi ts of currency appreciation passed through to them. As a result, when the dollar reached parity in September 2007, price discrepancies between Canadian and U.S. retailers became very noticeable to Canadian consumers, many of whom responded
by shopping online or travelling across the border.
All indications suggest the higher Canadian dollar is here to stay for the foreseeable future, and this will be a benefi t to retailers who are able to purchase merchandise and capital goods (e.g., new IT systems) at a lower cost. However, a major concern for retailers is that Canadians will once again head for the border when the major selling season starts in late summer, putting retail prices and profi t margins under pressure. |
