After showing strength in late 2022 and early 2023, consumer spending appears to be stalling. Retail sales were flat in June, based on preliminary estimates from Statistics Canada. That followed a 0.2% increase the previous month, falling short of the 0.5% increase economics were expecting. This slowing in consumption is more pronounced after adjusting for inflation and population growth. In volume terms, adjusted for inflation, retail sales rose just 0.1% in May.
Labour market strength has been the main factor supporting household spending and fuelling the persistence of excess demand that has been a concern for the Bank of Canada. May’s retail sales figure is evidence that a slowdown is materializing. With consumer finances being squeezed by an erosion in purchasing power due to rising interest rates and persistent inflation, the outlook for consumer spending is tilted to the downside in the balance of the year.
Travel Spending – Cash or Points?
Despite a slowing in retail sales, travel spending has remained strong. According to RBC, “[b]etween January and April of 2023, over 10 million Canadians returned from trips abroad. That’s up by 7% compared to the same period in 2019.” Economists are puzzled by this strength in discretionary spending, a trend that has been evident over the past year, according to data from a recent RBC Consumer Spending Tracker report.
Statistics Canada’s National Travel Survey (NTS) collects information about the domestic and international travel of Canadian residents, including the economic impact of tourism. NTS measures travel spending on a household basis.
A key question for economists is how much of travel “spending” is from the use of credit card points accumulated during 2020 and 2021. Beyond cash back, which make up the majority of rewards credit cards in circulation (44%), travel is the second most common rewards category (20%). These cards provide free flights, hotel stays, and vacation packages that can be redeemed with points.
Regardless of the category, consumers are drawn to credit cards for their rewards. According to Payments Canada, the top driver for regular credit card usage is not payment deferral, but collection of loyalty points. Research from Stanford University notes that “consumers receive around $50 billion per year in rewards for using cards.” Scaling this for the Canadian population and applying it to travel card usage would suggest roughly $1 billion a year is available in credit card rewards to fund travel for Canadians. These “savings” have likely been spent over the past year due to pent up demand from consumers who faced pandemic-related travel restrictions throughout 2020 and 2021.
From an economic perspective, this raises an interesting question: Is the strength of travel spending a result of the credit card rewards industry? If so, the Bank of Canada should not consider this as a sign of excess demand.
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