Canadians cautious in spending, investing

The sluggish economic recovery and the roaring stock market returns of 2009 have left Canadians unsure of what comes next. Optimism toward the economy appears to be growing, but many remain cautious in both their spending and their investing habits.

Canadians are evenly split on their views of the economy, with 51% saying it’s in good shape and 49% saying it was bad, according to RBC’s Canadian Consumer Outlook Index.

Sixty percent said they expected the domestic economy to improve over 2010, with only 17% saying it will worsen.

Most consumers (75%) reported paying for their holiday shopping with what cash they had on hand, rather than incurring debt. Retailers hoping to clear out their remaining 2009 inventory might be disappointed, however, as 58% of consumers said they had no plans to go bargain hunting in January.

“Canadians are becoming more optimistic but as this index shows, their focus remains on managing day-to-day expenses with many finding it hard to save for their retirement or their children’s education,” said David McKay, group head, Canadian Banking, RBC.

Thirty percent of survey respondents said they expect their personal financial situation will improve over the coming six months, while 43% expect it to improve over the next year.

Fewer Canadians expressed anxiety about their jobs in the latest RBC survey, with 21% saying someone in their household is worried they will lose their job, compared to 27% in the previous month’s survey.

“As noted in our recent economic forecast, the Canadian economy is set to grow, with real GDP rising by 2.6% in 2010 and 3.9% in 2011,” said Craig Wright, senior vice-president and chief economist, RBC. “While challenges remain, continued improvement in the labour market in 2010 will contribute to an eventual decline in the unemployment rate and provide ongoing support for consumer spending.”

The slow recovery is affecting where Canadian investors are placing their capital, according to a survey conducted for Scotiabank. The poll found 55% of respondents had a neutral opinion on the economy, a far less clear-cut finding than the RBC poll.

With more than half of Canadians unsure of where the economy was headed next, it should come as no surprise that investors are looking for any edge they can get. For many, the preferential tax-treatment of an RRSP or TFSA is that edge.

The study found that 41% of respondents held all of their investments within an RRSP, compared to just 29% in 2008.

“Considering the sharp portfolio losses many Canadians experienced in 2008-09, it’s not surprising to see a shift towards registered investments such as RRSPs and TFSAs,” said Andrew Pyle, wealth advisor, ScotiaMcLeod. “To help restore their nest eggs, many investors are opting to take advantage of the tax benefits offered by registered plans.”

Investors have become more cautious, with 50% saying they were opting for savings accounts. That puts savings in a close second place to mutual funds, which are held by 54%. The popularity of funds declined 11% since 2008.

“The movement towards savings accounts is a trend that began surfacing last year as Canadian investors have become more conservative in their risk tolerance, and are perhaps waiting for an opportune time to lock in their money,” said Pyle.

More than one third of Canadians (37%) said they are paying closer attention to their investments as a result of the economy.

The remarkably stock market rally since March 2009 appears to have repaired many portfolios, however, as 49% of respondents said they planned to retire before the age of 65, up from 43% a year ago.

(01/04/09)