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Confidence Improves Again Amid Signs of Easing Uncertainty

Canadian Economics

By: Loubna Zebiri

The Index of Consumer Confidence rose 4.5 points in May to 52.9 (2014 = 100). The survey dates are from May 10 to May 18.

  • Building on last month’s gain, the Index of Consumer Confidence increased to 52.9 per cent in May, signaling perceived relief and a possible stabilization among consumers amid reduced economic uncertainty.
  • Nevertheless, while this month’s increase in overall confidence is a continued improvement, it is still not enough to offset the longer-term decline in sentiment we have seen in recent months.
  • In this month’s survey, the change in consumer confidence varied across provinces. British Columbia experienced a decline of 2.0 percentage points compared to April’s survey and remained 23.2 percentage points lower compared to May of last year.
  • Other regions saw notable gains, however. Atlantic Canada led the increase in confidence in May, up 12.8 percentage points from the previous month. This was followed by Quebec, with an 8.4 percentage points rise, and Ontario, where confidence improved by 5.0 percentage points.
  • While consumers now appear to hold a more optimistic outlook regarding current conditions, those expecting better conditions six months from now remained stable.
  • The shift in current sentiment might be driven by several factors, including moderating inflation, relatively lower interest rates, the promised tax cuts (middle class) from the newly elected federal government, as well as greater clarity surrounding Canadian American trade dynamics.
  • Indeed, when asked about their current financial situation, consumers expressed modest improvement compared to six months ago, with the share of respondents expecting worsening conditions slipping 2.5 percentage points. Those expecting no change were up 1.7 percentage points.
  • As with the overall confidence index, this month’s change in financial sentiment does not fully reverse the overall declining trend seen since mid-2024, as the proportion of consumers perceiving an improved financial situation compared to six months ago was still 1.8 percentage points lower compared to last May.
  • Simultaneously, when asked whether it is a good time to make a major purchase, the proportion of consumers perceiving it as a bad time dropped for the first time since last October, reaching 64.1 per cent. However, this share is still 8.8 percentage points higher than the one registered last October.
  • Expectations regarding future economic conditions remained largely neutral, with the proportion of respondents anticipating improved financial prospects and better labour market outcomes remaining stable.
  • The share of respondents expecting their finances to remain unchanged over the next six months increased 5.4 percentage points. Similarly, the proportion of consumers anticipating no change in labour market demand rose by 1.8 percentage points.
  • Overall, consumer confidence has improved on a monthly basis, reflecting short-term optimism. However, the longer-term trend continues to show signs of moderation, with sentiment remaining below historical averages. While current conditions may be viewed more favorably, underlying concerns about the broader economic outlook persist, limiting sustained confidence growth.

Insights

Carbon tax abolition makes its first mark on inflation numbers. After reaching 2.3 per cent in March, year-over-year headline inflation dropped by 0.6 percentage points to 1.7 per cent in April, largely due to a decline in energy prices as the carbon tax was abolished. However, this drop in the Consumer Price Index masks underlying inflationary pressures, as core inflation remains steady, rising by 2.6 per cent in April, up from 2.4 per cent in March.

Clarity over the trade dynamics calls for a more moderate outlook for headline inflation. Initially, broad-based retaliatory tariffs were expected to drive an increase in inflation, impacting a wide range of goods. However, the focus has shifted to select U.S. products, including steel, aluminum, and non-CUSMA-compliant automobiles.

Ongoing uncertainties in the geopolitical landscape continue to pose risks, however. While the easing of certain trade tensions may offer some relief, the broader geopolitical uncertainties, including potential retaliatory measures and policy reversals, continue to pose risks that could impact Canadian key economic sectors. This includes manufacturing and natural resources, both of which are heavily influenced by international trade dynamics.

Federal tax reduction will provide relief to middle-class Canadians. The recently announced reduction in the income tax rate from 15 per cent to 14 per cent for middle-income earners, effective July, is expected to benefit around 22 million Canadians, increasing disposable income and potentially boosting consumer spending. However, this tax cut is projected to result in a $27 billion revenue loss over the next five years. With the budget declaration postponed to autumn, it remains uncertain how the government will cover this shortfall and balance fiscal priorities.

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