The Bankwatch

Tracking the consumer evolution of financial services

Consumer mindsets in North America have shifted permanently with regard to finances

After my last post, I thought it better to follow up with some facts to support my contention that this economic recovery is L shaped in Canada and US.  This is not meant to be an economic projection, and I leave that to the professional economists.  However in terms of planning, banks ought to consider the high probability of a scenario where the reduction in economic activity will level off but hardly see growth in the near future.  This will be driven by consumer confidence and frankly their financial circumstances.

If we go back to the root cause of the recession it remains this;   a dramatic drop in consumer asset values resulting in leverage that is too high.  Layer in the concern about job security, and the real increase in unemployment, we must look carefully at ability to manage the debt based on current income, and the effect of that on the business of banking.

Here is the ratio of debt to disposeable income in Canada and US at end of 2008. [source: CGA Association Canada & Federal Reserve Bank of San Francisco]

Canada              US

%                                  136.5%             130%

The first surprise is that Canadians are more highly levered than Americans.  The CGA report makes these points amongst others:

… prospects of improving households’ financial situation in the near future are low. A balanced approach to spending, saving and paying down debt may be a desirable feature of households financial behaviour in the near future.

Hardly earth shattering stuff but the consequences remain that strategies need to account for this new consumer mindset in North America for the next few years.

Written by Colin Henderson

June 22, 2009 at 14:47

3 Responses

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  1. The consumer is key. But their need to regain control over their balance sheets doesn’t explain why even wealthy households are cutting their spending. What we are experiencing is result of the impact of as many as seven major inflection points, some from arcs of several decades, occurring at the same time. Institutions need to develop scenarios that are aware of all of them, and then devise strategies to take advantage.

    Larry Cohen

    June 23, 2009 at 07:54

  2. Thats an insightful point Larry. In any event clearly a scenario approach is the right one to develop flexibility and alternatives.

    Colin Henderson

    June 23, 2009 at 09:24

  3. […] Consumer mindsets in North America have shifted permanently with regard to finances […]

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