Although the Bank of Canada (BoC) anticipates the Canadian economy will shift toward exports and business investment, for now much depends on an increasingly debt-burdened consumer. While the Canadian economy is somewhat less dependent on consumer spending than the US economy, household expenditures have been a key source of strength during the largely anemic recovery.

Indeed, according to data provided by Statistics Canada, last year’s household final consumption expenditure accounted for 54.3 percent of gross domestic product (GDP). And that figure has risen by 13.7 percent since 2008, to CAD987.4 billion, versus an increase of 10.6 percent in overall GDP, to CAD1.8 trillion.

By contrast, the dollar value of the export of goods is still down by about 5.1 percent since 2008, near CAD462.5 billion. Though the export of services has risen since then, by 5 percent to CAD84.1 billion, the dollar amounts involved have not been sufficient to offset the decline in the export of goods. In 2008, total exports accounted for 34.5 percent of GDP, but by 2012 their contribution had dropped by 4.5 percentage points.

The economy’s dependence on the consumer means that the BoC is largely constrained from raising rates until greater demand for the country’s exports finally materializes. After all, a rate hike would crimp the ability of consumers to spend, thus derailing an already fragile economy. At the same time, real estate prices in large metropolitan areas, such as Vancouver and Toronto, are clearly at unsustainable levels, and that makes regulators nervous.

Fortunately, consumers appear to be managing their debt burdens responsibly. The increase in non-mortgage consumer debt is decelerating, up just 1.7 percent in September, the slowest pace since August 1993.

And delinquency rates remain low. According to the latest data from the credit bureau Equifax, the percentage of non-mortgage loans that are past due by 90 days or more dropped to 1.1 percent during the third quarter, which is a record low. And while bankruptcies were up by 2.1 percent in August compared to a year ago, they’ve been in a downward trend since the Great Recession.

But all of that could change with higher rates or rising unemployment. Consumers’ debt-to-disposable income remains near record highs, at 163.4 percent during the second quarter. At those levels, it would be wise not to take Canadians’ current approach to debt management for granted. As Canadian banking regulator Julie Dickson recently noted in her remarks on the state of the mortgage market, delinquency rates and credit scores are lagging indicators that can quickly deteriorate if the economy worsens.

Meanwhile, as evidenced by September’s retail numbers, Canadian consumers are still spending. Sales climbed 1 percent from the prior month, to CAD40.7 billion, beating economists’ expectations of a 0.3 percent increase by a wide margin. The automobile sector powered this performance, with sales of motor vehicles and parts rising 4.1 percent, to CAD9.7 billion, including a 5 percent jump in the sale of new cars spurred by dealer and manufacturer incentives. Outside of this arena, however, sales were essentially flat.

Canadian regulators are in a tricky situation. While they’re loath to admit to any bubbles publicly, they’re clearly struggling with how to constrain the growth in consumer debt without upending the economy. And it’s rare to get the timing right except in hindsight.

Until exports show greater strength, it’s unlikely for the proverbial punch bowl to be taken away. That means regulators will have to resort to scolding the public for its profligacy. That approach would yield no results in the US, but perhaps it’s different in Canada.

The Roundup

As Chief Investment Strategist David Dittman has noted in recent months, it was only a matter of time until Lightstream Resources (TSX: LTS, OTC: LSTMF) would have to cut its dividend. That finally happened on Nov. 21, with the company announcing it would be halving its payout to CAD0.04 per month. In the short term, the dividend cut has been a negative, as investors dumped the stock, causing the share price to drop by as much as 8.9 percent.   

But in the long term, this move should prove positive for the company’s fundamentals, as it frees up cash that should help the company finance its growth plan while servicing its considerable debt load. If management successfully executes on its new strategy, the market will ultimately reward it.

At the same time, the company has an enviable collection of assets focused on light crude oil. That makes the firm an attractive takeover candidate, particularly at current prices. As such, we think it makes sense to continue holding the stock while management implements its new strategy.