Despite the stagnant growth in real wages, Canadian household consumption rose steadily throughout 2023. Annual household expenditure expanded by 950 CAD compared with the previous year. This expansion persisted as consumers adapted to the rapid rise in import prices driven by the depreciation of the Canadian dollar (CAD). Domestic spending was also supported by wealth effects, as Canadian residential property values climbed by an average of 5.7% over the year.
To sustain their consumption levels, many Canadian households relied heavily on revolving credit and short-term debt. In 2023, outstanding credit card debt expanded by 7.8%, representing a sharp escalation in consumer borrowing. The Bank of Canada (BoC) raised concerns regarding the sustainability of this debt accumulation in an environment of low real income growth. Consequently, the BoC indicated that monetary policy tightening might accelerate, raising borrowing costs and potentially cooling household consumption in the near term.
Explain the likely effect of a fall in the exchange rate of the Canadian dollar on aggregate demand. Refer to Extract A in your answer.
