Canada Consumer Sentiment Falls on Quebec Separation Talk

Canadian consumer confidence continued to decline last week as an election campaign in the French-speaking province of Quebec raises the prospect of a referendum on independence.

The Bloomberg Nanos Canadian Confidence Index fell to 58.0 in the week ending March 21 from a prior reading of 58.4. Sentiment in Quebec dropped 1.1 points to 56.0 amid the campaign and with employment and inflation data suggesting the economy in the country’s second-most populous province is struggling. Confidence in British Columbia also declined as truckers continued to strike against Port Metro Vancouver, affecting companies such as Vancouver-based Canfor Corp.

“Speculation of a referendum has likely had a chill effect on confidence among a segment of Quebeckers,” said Nik Nanos, head of Ottawa-based Nanos Research. Declines in the national index were also “driven by personal finances and the views of Canadians in British Columbia and Quebec,” he said.

Voters in Quebec, the resource-rich province that borders Maine, New Hampshire, Vermont and New York, choose a government April 7. A majority for Premier Pauline Marois, leader of a minority Parti Quebecois government since September 2012, would set the stage for a possible referendum on secession from the rest of Canada, a prospect that in the past has roiled credit and currency markets.

‘Wary Eye’

Traders are “keeping a wary eye on the Quebec election,” BMO Capital Markets chief economist Doug Porter wrote in a client note. Canada’s dollar fell to four-year lows last week as central bank governor Stephen Poloz said he couldn’t rule out an interest-rate cut if the economy weakens, while the U.S. Federal Reserve signaled a possible interest rate increase in 2015.

The Pocketbook Index for Quebec -- based on questions about personal finances and job security -- fell to a six-week low of 60.6 from 63.1 in the last report, the Nanos data showed. The province’s Expectations Index -- based on perceptions of the economic outlook and home prices -- rose to 51.5 from 51.1. Confidence in Quebec had been at its highest since 2010 before the drops of the last two weeks.

Price declines in financial securities sparked by separation anxiety may be creating a buying opportunity, according to Ed Devlin, the London-based manager of Pacific Investment Management Co.’s Canadian bond funds. Investors have turned toward Quebec debt with Marois downplaying secession talk and support for the federalist Liberals increasing.

Buying Opportunity

The extra yield investors demand to buy Quebec’s 10-year bonds rather than Ontario’s narrowed last week to 16 basis points from 20.5 basis points on March 12, which was the biggest premium in a year.

Polls indicate the Parti Quebecois’s popularity has declined since Marois called the election March 5 while support has grown for the Quebec Liberal Party, which advocates remaining a part of Canada and is led by Philippe Couillard.

A poll released March 19 by Ipsos Reid for CTV News showed the Liberals with the support of 37 percent of Quebeckers, compared with 32 percent for the Parti Quebecois. Only 18 percent of the population supported holding a referendum in the next mandate. A poll by Montreal-based market research firm CROP for La Presse newspaper, published March 18, had the Liberals with 39 percent support and the Parti Quebecois with 36 percent.

For his part, Couillard sought to link increased talk about separation with weakness in Quebec’s economy.

‘Another Referendum?’

“Do you want to elect the Parti Quebecois that will hold another referendum, or the Liberal Party of Quebec that will be occupied with the economy, jobs and health?” he said in the March 20 debate.

Quebec’s unemployment rate in February -- 7.8 percent -- exceeded the national 7 percent rate, Statistics Canada reported March 7. The gap has averaged 1.3 percentage points over the last two decades, according to the statistics agency. Quebec lost 25,500 jobs in February, while employment in the rest of the country rose by 18,500. Retail sales climbed 1.4 percent in January from a year earlier, the slowest pace among the 10 provinces, and inflation in the province was 0.4 percent in February, compared with a national rate of 1.1 percent.

“Although early polls suggested an advantage for the sovereigntist Party Quebecois, the Quebec Liberals are trending up,” Nanos said.

Marois said in a March 20 televised debate her Parti Quebecois would focus on the economy and wouldn’t hold a referendum until Quebeckers want one. Political opponents pressed for details about her plans for independence should her party win the April 7 election.

‘Clear Rules’

Marois continued to focus her comments on the economy after the debate, telling reporters March 21 near Montreal that “the issues are clear: a Quebec that wants to advance toward employment, toward clear rules in terms of living together.”

Poloz declined to comment after a March 18 speech in Halifax, Nova Scotia, when asked about Marois’s suggestion Quebec could keep using the Canadian dollar and seek a seat on the Bank of Canada’s board if the province separated.

Deputy Governor Tim Lane reiterated in a speech today it will take “around a couple of years” for the economy to return to full output and inflation to reach policy makers’ 2 percent target. “Recently of course, the Canadian economy has had still a situation of significant excess supply,” he said in response to a question after remarks at York University in Toronto.

In British Columbia, sentiment fell to 57.3 from 59.2. Truckers who started job action Feb. 26 against Port Metro Vancouver, the country’s largest port, face a provincial order to return to work that would come into effect as early as today.

Personal Finances

The Nanos data showed other indications of weakening Canadian consumer confidence. The share of respondents who reported being better off over the past year in terms of personal finances fell to 20.7 from 21.7 the week before. Those who said their jobs were somewhat or not at all secure rose to 12 percent from 11.7 percent, and those who believe real estate prices in their neighborhood will fall in the next six months climbed to 14.4 percent, the highest since September.

Consumer confidence in both the U.S. and Canada has been trending lower, said Joseph Brusuelas, senior economist at Bloomberg LP. “The knock-on effects of diminished expectations are lackluster growth of household expenditures and retail sales,” he said.

Canadian consumers may also be constrained by debt levels that remain near records as a share of income. The ratio of household debt to income was a record 164.2 percent in the third quarter before declining to 164.0 percent in the fourth quarter.

“I remain as concerned as I was a year ago about the household debt levels that we have, Peter Aceto, chief executive officer of Bank of Nova Scotia’s ING Direct Canada unit, said in a March 20 interview in Toronto. ‘‘There is a lot more room for Canadian households to be healthier.’’

The Nanos data are based on phone interviews with 1,000 people, using a four-week rolling average of 250 respondents. The results are accurate within 3.1 percentage points, 19 times out of 20.

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