The Canadian consumer remains well positioned to take on an economic downturn even though inflation is running at multi-decade highs and some surveys suggest more people are feeling the financial pinch.

A common theme among Canada’s banking executive teams during third-quarter results announced last week was their confidence in the resilience of consumers, who are still enjoying larger-than-normal savings buffers and low impaired loan rates. Economic factors, including a strong job market, are also driving optimism.

“While we closely monitor early warning indicators, both gross impaired loans and (provisions for credit losses) on impaired loans remain low as our clients continue to demonstrate resilience despite rising costs,” said Royal Bank of Canada chief executive Dave McKay during an Aug. 24 conference call.

McKay added that while we are getting closer to the end of an economic cycle, inflationary pressures appear to be peaking as monetary policy grows more aggressive and are not likely to bring about a severe downturn on their own.

“That would also require higher unemployment, and we believe the current strong job market is a differentiating factor relative to the beginning of prior downturns,” McKay said. “Although there is high leverage in the system, our clients are entering the cycle with stronger liquidity than in prior ones, including healthy corporate balance sheets and increased personal savings across FICO bands in Canada. Consumer spending also remains robust.”

Our clients are entering the cycle with stronger liquidity than in prior ones

Dave McKay, RBC CEO

These remarks come as inflation hit 7.6 per cent in July and insolvencies rose by 20.1 per cent in June from a year earlier — the fastest pace since March 2020, according to Charles St-Arnaud, chief economist at Credit Union Central Alberta. St-Arnaud added that while insolvencies remained lower than pre-pandemic levels, they appeared to be rising quickly.

Surveys are also warning that some consumers are struggling with rising costs. An August report by personal finance rate comparison website Finder noted that 36 per cent of more than one thousand surveyed Canadians were taking on debt to cover essential costs such as rent, mortgage payments, food and transportation.

A Deloitte economic outlook report in June credited consumer spending and residential investments as drivers that pulled Canada out of a recession during the tail-end of the pandemic, but cast some doubt on whether consumers can continue to carry the day as inflation pressures outpace wage growth and mortgage renewals at higher rates come due.

“As a result, we can no longer rely on households to support the economic recovery to the same extent as in recent years,” Deloitte noted.

Despite the anxiety over the one-two punch that rising rates and high inflation may deliver, an Aug. 22 note from the Canadian Imperial Bank of Commerce’s economics team suggests consumers may be more resilient in a downturn than expected.

Benjamin Tal, deputy chief economist at CIBC Capital Markets, pointed to positive debt-servicing trends despite rising borrowing costs and a savings buffer that CIBC estimates is in excess of $300 billion as the largest factors protecting consumers against a severe economic downturn. Even though borrowing costs are rising, Tal notes the policy rate would have to be “miles above what’s reasonable at this point” to have any notable macro implications.

Neil McLaughlin, head of personal and commercial banking at RBC, also said consumers were sitting on a significant cash cushion.

“We’re still in a position where we see we see high liquidity in consumer accounts,” McLaughlin said, pointing to the more than $10 billion that has been pushed into guaranteed investment certificates. “That’s cash on the sidelines that provides additional cushion for those customers and we’re starting from a very low point of delinquencies and credit losses…. So, we’re starting from a good point.”

Both RBC and CIBC reported strong loan-volume growth during the latest quarter, with RBC’s Canadian banking segment’s net interest income growing 14 per cent largely due to volume growth and margin expansion. McKay also told shareholders the bank is continuing to see healthy consumer discretionary spending with total spending standing 30 per cent above pre-pandemic levels.

CIBC’s net interest income also grew, with a 12 per cent year-over-year surge in loan volumes that Canaccord Genuity analyst Scott Chan noted was largely fuelled by mortgages. CIBC’s management admitted mortgage demand is expected to slow amid rising rates.

On the mortgage front, RBC chief risk officer Graeme Hepworth noted that over 65 per cent of mortgages in RBC’s portfolio are fixed rate and that only 17 per cent will come up for renewal in 2023, while the majority of mortgages with the highest loan-to-value ratios and lowest interest rates won’t come up for renewal until 2025 and beyond.

While RBC noted that upcoming rate hikes could trigger an average increase of $200 in monthly payments for about 80,000 mortgages, executives do not anticipate many of these borrowers will even require a cautionary phone call from their banks.

The National Bank of Canada joined other banks in arguing that strong economic indicators such as a solid job market are supporting consumer loan repayments, though the tone of its outlook was more sobering.

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“Our visibility on the outlook for performing (provisions for credit losses) remains more cloudy due to the significant uncertainties in the economy’s path forward,” said National Bank’s vice-president of risk management, William Bonnell. “The same factors we discussed last quarter: inflationary pressures, supply chain challenges, geopolitical risks and the direction and speed of interest rate changes are still present and all contribute to a less certain outlook.”

Meanwhile, Shilpa Mishra, the managing director of the capital advisory team at BDO Canada LLP, called the consumer resilience story a “bright light” amid economic uncertainty.

“Many are looking to the future with a doom-and-gloom perspective, but that is not our view,” Mishra said, noting the strong performance of the banks, traditionally a bellwether, and that unemployment remains low despite the headwinds.

“The story of the Canadian consumer and Canadian businesses is the bright light. It’s the story of can’t stop, won’t stop,” Mishra said.

• Email: shughes@postmedia.com | Twitter: StephHughes95