Source: The Canadian Press

Household spending fell last year for the first time since Statistics Canada began to track it, suggesting that Canadians were taking on debt to pay the bills during the recesssion rather than buy something special, economists say.

Average household spending in Canada declined 0.3% to $71,120 in 2009, when the economy was paralysed by a global economic downturn that began late in 2008, according to the results of a survey released Friday.

The agaency said the decline — “following the economic slowdown that began in the fall of 2008” — was the first since its annual Survey of Household Spending was introduced in 1997.

Last year, the economy was in the midst of the first major economic downturn since the Second World War.

However, this recession was much different because consumer credit continued to grow, pushing household debt to record levels. That’s rare in times of economic crisis, said Derek Burleton, deputy chief economist at TD Economics.

“For people that lost their jobs, the use of revolving lines of credit and other forms of credit could have been used as short-term income replacement and that might be one wedge between the debt (and spending),” Burleton said.

As a result, the ratio of debt to disposable income now stands at 148.1%, slightly ahead of the U.S. ratio of 147.2%, according to data released last week. That means Canadians owe $1.48 for every dollar of disposable income they have.

Spending on goods and services was down 0.7% last year as households reduced spending on discretionary items or those that could be postponed, such as recreation and household furnishings.

The decline in spending was largely a result of falling income levels as many Canadians lost their jobs and the unemployment rate climbed to over 8%, said Avery Shenfeld, chief economist at CIBC Word Markets.

The Bank of Canada dropped its overnight rate to record lows of 0.25% during the recession in order to stimulate the economy and encourage domestic spending.

In the second half of 2009, consumer confidence picked up and Canadians began to take advantage of low variable mortgage rates, which are tied to the central bank’s prime rate, to flood into the housing market.

“Some of the weaponry that was used to get the country out of recession, including record low interest rates, was designed to encourage Canadians to borrow and buy houses, cars and other consumer goods — and they have,” Shenfeld said.

And while spending has declined, the amount of purchases financed with debt likely increased at the same time, he added.

Bank of Canada governor Mark Carney warned earlier this week that partly as a result of low interest rates, Canadians have rapidly increased the amount they have borrowed during the recession and recovery. And the proportion of households with stretched finances has ballooned.

Household credit has grown by 7% since the recession’s trough, compared to a 3.5% decline in the U.S., perhaps an indication that Canadians believe the easy ride on debt payments will be permanent, he said.