OTTAWA - Consumer confidence in both Canada and the U.S. -- the mainstay of the two economies -- is plummeting in the wake of the market meltdown and ongoing credit crisis.
People's faith in Canada's economy has fallen to the lowest level in 26 years, according to the Conference Board of Canada, which surveyed 2,000 individuals this month.
The new survey, conducted Oct. 2-8 when the financial turmoil intensified, sharply reversed three previous months of rising optimism as the confidence index fell 11.9 points to 73.9. That was the lowest level since the third quarter of 1982, when Canada was mired in recession.
When Canadians are leery about their financial futures, they tend to curtail spending, leading to a downward spiral in which businesses see drooping revenue and layoffs loom. It's a vicious circle that is difficult for an economy to break free from.
In a separate reading in the U.S., the Reuters/University of Michigan monthly survey showed Americans' confidence crashing to 57.5 from 70.3 in September, the steepest one-month drop on record since the index began in 1952.
"The global credit crunch and major stock market declines clearly had an effect on consumer confidence in October," said Pedro Antunes, the Conference Board's director of national and provincial forecasts.
"In addition, consumers felt that they would be worse off in six months, indicating concerns that the financial crisis would not be resolved quickly."
All regions in Canada and all components of the index declined, including respondents indicating they were less optimistic about their job security and that now was a poor time to make major purchases.
Confidence fell drastically in Ontario -- plummeting 16.6 points from 84.5 in September to 67.9 in October, in the steepest monthly decrease on record for the province.
The index, set at 100 in 2002, fell 12.5 points in British Columbia, 10.2 points in Quebec, 6.1 points on the Prairies and 4.9 points in Atlantic Canada.
In a separate report, RBC Dexia Investor Services said the markets tumble had sliced 8.6 per cent off the value of major Canadian pension plans between July and the end of September.
That's the worst one-month fall in a decade, said Don McDougall, the director of advisory services in a statement posted on the firm's website. And it could get even worse in the fourth quarter, given that stock markets fell precipitously in the first two weeks of October.
"It hasn't been pretty, and judging by the performance in October so far, the situation is not getting any better," he said.
TD Bank chief economist Don Drummond says the drop in consumer confidence is not surprising given the recent spate of negative economic news, especially emanating from the U.S. The surprise is how quickly the outlook has darkened.
Friday brought more bad news with the Commerce Department reporting that new home construction fell 6.3 per cent last month, pushing the annual rate to the slowest since 1991 to 817,000 units. That's a collapse from the over two million units that were being constructed just two years ago.
Scotia Capital economist Derek Holt said consumer confidence surveys have historically been poor guides of buying intentions, pointing out that the index dropped following 9-11 but consumers actually did the opposite -- went out and spent.
"But I really believe this time it's different," he said. "This time all the consumer cash and wealth drivers are pointing to a pretty bearish consumer outlook."
Bank of Montreal chief economist Sherry Cooper has also suggested the U.S. and to a lesser extent Canada is heading into a consumer-led recession.
"It is no longer seen as a housing recession, but a full-blown consumer recession," she wrote in a note to clients. "The consumer has represented as much as 72 per cent of the U.S. economy in recent years, so the deceleration in household spending has a profound impact on the overall economy."
BMO, Bank of Nova Scotia and Merrill Lynch have forecast a recession for both the U.S. and Canada in 2009. A Consensus Economics survey, however, showed Friday that on average most Canadian analysts see the Canadian economy slowing sharply but still growing 1.1 per cent next year.
