Canadian economy expected to slow as consumer confidence falls

The Canadian economy is facing a slowdown over the next few months, the Conference Board of Canada said Tuesday, noting high gasoline prices helped push consumer confidence in August to its lowest level in over a year.

The private-sector group's index of consumer confidence survey for August found Canadians had a gloomier outlook on family finances, job market prospects and big-ticket spending.

"Any time you start seeing energy prices rising - you start seeing it more and more at the pump - that starts to affect people's confidence," said Pedro Antunes, director of economic forecasting at the Conference Board.

"If you go to fill up your car and you're paying $60, you've got a lot less for consuming anything else. So restaurants, big-ticket items, stuff like that will suffer."

In August, 54.4 per cent of respondents said the time was right for purchasing a home or car, a decline of six percentage points from July.

The index recorded a confidence decline of 5.6 points to 118.3, with decreases in all regions of the country.

It's the first time this year the index has seen a significant monthly decline, and the first time it's come down below 120 - which Antunes considers fairly low consumer confidence.

The July index was 123.9, with an average of 123 for most of this year and a range of between 120 and 125 for the last three years.

British Columbia experienced the sharpest decline, falling 7.8 index points. Confidence in Ontario declined by 6.9 points and the Prairies lost 5.5 points.

Don Drummond, chief economist at TD Financial Group, said he also expects the economy to show signs of slowing down for some time.

"The consumption has been roaring along, particularly in the first quarter this year - it was extraordinary strong," he said. "I don't think it will decline, but I think it's going to come down to a much more modest pace of growth."

The increase in gasoline pump prices, and the natural gas prices consumers will face this winter, will weaken consumption of other products, with or without an interest rate increase by the Bank of Canada Wednesday, he said.

Drummond predicts the pace of consumption growth will slow down in the last half of this year, with a small reprieve in the first half of 2006 before it weakens off again.

Economists expect the consumer confidence index to be worse for September, once the impact of hurricane Katrina and the gasoline price hikes that have taken place in its aftermath are taken into account.

The conference board survey was conducted in mid-August, before hurricane Katrina struck the U.S. Gulf region and helped push Canadian gasoline prices into the stratosphere.

"People see what happened in Louisiana, and all the people over there that the government was not able to take care of," said CIBC senior economist Benjamin Tal.

"This is a psychological thing that certainly affects consumer confidence. If you add to it the impact of energy and gasoline prices and the fact because of that also the Canadian dollar is rising - all of that is actually negative for the consumer in the short term," he said.

Tal said he expects a small upturn in the economy when the flooded city of New Orleans starts rebuilding in the next three to six months.

Another small boost would be if interest rates don't rise as much as expected, because 30 per cent to 35 per cent of the housing market is made up of people with variable-rate mortgages, which will be affected by higher short-term rates.

But even that, he warns, would only provide a "little lift."

The Bank of Canada is widely expected to raise its key overnight rates by a quarter point on Wednesday, the first hike by Canada's central bank since October 2004, but it's less clear whether further increases will follow this year.

The conference board survey, conducted between Aug. 11 and 16, is constructed from responses to four attitudinal questions posed to a random sample of Canadian households. The latest results are based on over 2,000 telephone interviews.

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