Consumption patterns in US, Canada likely to be directed by the shift in demographics

The United States and the Canadian economies have long benefitted from consumer spending, accounting for a majority of the countries’ gross domestic product. While consumption spending contributed to more than two-thirds of the US economy, Canada reaped in almost half of the benefit.

Moreover, shift in demographic structure is a clear implication that there will persist sectoral performance only, with some sectors outperforming the others, as the taste and preferences of the existing population spread will change as well. Relative outperformance is expected for the sales of durable goods (such as motor vehicles, furniture, and large appliances), and of medical services, the strongest performing category examined.

Furthermore, aggregate borrowing will change as well. The parameter is expected to rise at a somewhat slower pace, with millennial borrowing only partially offsetting declines elsewhere in the population. Growth in real spending is expected to fall below 2.0 percent in both the US and Canada in the coming decade.

According to a corporate survey, consumer spending on both goods and services is expected to decelerate somewhat, with the key exception of spending on medical services, which are forecast to rise as much as 7 percent per year between 2016 and 2025. Borrowing patterns are also affected, with consumer credit growth expected to slow to about 4-6 percent on average in the coming decades.

Meanwhile, Canada’s high household debt level poses a particular risk to consumer spending, especially in the context of population aging. International experience suggests that if households enter a deleverag­ing phase, Canadian spending growth could reach as low as 1 percent per year on average for as long as four to six years.

Finally, it is important to note that  just as demographics are likely to result in a slower pace of consumer spending, in many ways this is a reflection of the outlook for the economy as a whole, as shifting demographics pull the economic cruising speed lower in coming years.