Canadian household spending trends
Despite a slowing manufacturing sector, Canadian household consumption rose by 3.5% in 2023. This unexpected resilience in consumer spending was driven by a strong wealth effect as urban residential property values climbed, alongside a significant drawdown on accumulated pandemic-era household savings. This rise in consumption occurred despite persistent inflation and successive interest rate hikes by the Bank of Canada.
To sustain this level of discretionary spending, many households have increasingly turned to home equity lines of credit (HELOCs) and alternative credit schemes. Total household debt-to-disposable-income ratios have reached record highs, raising concerns among financial regulators about systemic risks and the vulnerability of highly leveraged households to further borrowing cost increases. Economists warn that if consumers are forced to deleverage, it could lead to a sharp contraction in aggregate demand.
Assess the likely impact on the Canadian economy of an 'increase in consumption' (Extract A, paragraph 1). Use an aggregate demand and aggregate supply diagram in your answer.
