Source: The Canadian Press

Canadians are likely to find themselves less inclined to part with their money in the new year as consumer confidence remains subdued and governments begin to tighten their belts, according to economists.

Bank of Montreal economist Robert Kavic expects lower spending by consumers next year, especially in the housing sector, even though he predicts interest rates will remain stable.

“There was a lot of pent-up demand coming out of the recession. We saw a really big bounce in home sales …and that’s starting to taper off,” said Kavic, adding that the expiration of the federal home renovation tax credit incentive and introduction of HST in Ontario and British Columbia have a negative effect on spending.

Canadian consumer confidence is ending 2010 on a subdued note, despite an upswing early in the year, according to a poll released Wednesday.

The Harris/Decima phone survey measured consumer confidence at 82.8 in November, little changed from a third-quarter reading. The agency said consumer confidence hit a post-recession peak of 89 in February, but fell in the following two quarters.

The survey rated consumer confidence by asking respondents about their financial situations and whether they thought now would be a good time to buy big-ticket items. Economists track consumer confidence numbers as a measure of spending and general health of the economy.

“If consumers feel confident and are more likely to spend, then businesses feel more confident in making maybe further investments in their manufacturing or maybe in their labour force. It can be a multiplier effect,” said Jack Courtney, of the Investors Group, the insurance company that commissioned the survey.

Toronto-Dominion Bank senior economist Pascal Gauthier said that higher household debts, the introduction of the HST in Ontario and British Columbia, and HST increases in Quebec and Nova Scotia are all cutting the amount that people have to spend.

“(Consumer fatigue and debt) are going to be the main headwind in an environment where interest rates are likely to rise” in the second half of the year, he said.

But even though consumer confidence will grow at a slower rate, private investment will likely make up for lower consumer spending, lessening the overall impact on the economy, he said.

The Canadian confidence readings released Wednesday are more positive than U.S. numbers released Tuesday, that showed consumer confidence in that country slid to 52.5 in December, down from 54.3 in November, amid high unemployment.

The Canadian poll found that Quebec and the Prairies were the most confident regions in the country, with numbers at 84.6 in Quebec and 88.3 in Manitoba and Saskatchewan — above the national average in November.

British Columbia was the least confident province, ending the year at 78.4 in the fourth quarter. That reversed stronger numbers at the beginning of the year, when the index in that province stood at 88.3.

Ontario also saw a large decline, with 81.5 in the final quarter, down from 86.5 at the beginning of the year.

The poll has a margin of error of 2.2%, 19 times out of 20.

BMO predicts that the provinces will also hold back from spending, and that we’ve seen the last of stimulus spending in this country, as some provincial governments try to dig themselves out of holes they made trying to generate economic recovery.

“Some provinces will be more aggressive than others, like in Central Canada, for example, where fiscal holes are quite a bit deeper than Western Canada,” said Kavic, who added Ontario could take up to seven years to balance its budget after its manufacturing sector took a nosedive during the recession.

“They’d rather start acting right away as opposed to delaying it for a couple of years,” he said.

Gauthier said that just as government spending cannot revive an economy, it can’t drive an economy into recession in and of itself.

“Business investment is expected to take up some of that slack. Once recoveries seem fairly well established, which it is in Canada, (governments) have to take a step back and balance their budgets,” he said.

A high loonie will also contribute to sluggish growth in Central Canada, which has a bigger manufacturing and export base compared to the Western provinces, who are expected to lead the country in growth at an average of 3.5%, said Kavic.

He said this is largely due to higher commodity prices, in particular that of oil, which is anticipated to hover around US$80 to $90 per barrel in 2011.