Businesses warned to brace for spending slowdown

Businesses should brace themselves for a likely slowdown in Canadian spending in 2010 as consumer fundamentals are at their weakest point in 15 years and do not match up with recent rebounds in sentiment, a new CIBC World Markets report says.

Benjamin Tal, economist with CIBC, has developed a new consumer capability index based on seven economic factors to measure the ability of Canadians to spend.

This differs from the traditional consumer confidence survey, which asks Canadians if they feel they can maintain their spending.

"The recent surge in spending is not backed up by rising consumer fundamentals," Mr. Tal said in the report. "The 'V-shaped' recovery in consumer confidence we have seen throughout the second half of 2009, has actually coincided with a drop in the ability of households to spend."

He warns that if, as expected, the Bank of Canada raises interest rates in the summer, it will have an unexpected side effect on spending as Canadians have been spending through increased debt, not rising income.

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