The Canadian recovery is not following the divergent 'K-shaped' pattern visible in the United States, and that absence may be a worrying sign rather than a reassuring one, says CIBC economist Andrew Grantham.
Grantham points out that consumer spending in Canada is unusually even across income brackets. While the U.S. rebound has been driven predominantly by high-income households benefiting from rising asset values, Canada shows little of that split. On the surface this balance might look positive, but Grantham cautions it is hiding a different problem: lower-income households appear to be financing continued expenditure by weakening their personal balance sheets.
"Individuals have been dipping into savings to fuel some of the extra spending," Grantham notes, and he stresses that this pattern cannot be maintained forever. The characterization of a 'K-shaped' economy refers to situations where different population segments move in opposite directions - for example, affluent households gaining from asset appreciation while lower-income groups struggle with inflation and debt pressures. That dynamic is apparent in the U.S., but less so in Canada.
Even though Canadian consumption looks steadier across groups, Grantham warns this steadiness conceals a growing fragility. He says it "may not actually be OK that we haven’t seen a 'K' shape in Canadian consumer spending" because the apparent stability masks strains on household savings and the labour market.
High-income Canadians have shown an unexpectedly conservative stance toward spending despite meaningful gains in wealth. The economist suggests that part of that caution stems from heightened sensitivity to interest-rate dynamics: many affluent households are still dealing with mortgages that are resetting to higher payments.
Supporting that concern, a Bank of Canada survey found a record 5% of top earners now fear they might miss a debt payment. Grantham says this worry among wealthier households complicates the outlook for aggregate demand through the remainder of the year.
Absent a notable uptick in high-end consumption or a material improvement in incomes for lower-income cohorts, CIBC judges the growth outlook will remain subdued. The bank concludes that, given current conditions, the Canadian economy is unlikely to gather enough sustained momentum to warrant interest-rate hikes before 2027.
What to watch
- Household saving trends and the pace of balance-sheet erosion among lower-income groups.
- Spending behavior among high-income households as mortgage resets and interest-rate sensitivity continue to play a role.
- Aggregate demand indicators that would signal whether either end of the income distribution is starting to drive growth.