The Conference Board of Canada said Wednesday that its index of consumer confidence fell 3.3 points in October to 71.8. That is its lowest level since May 2009 as the economy began to recover from the depths of the recession.
The index, based on a survey conducted early this month, is measured against a reading of 100 in 2002.
October's drop overshadows a slight improvement in September after a dismal report in August. It was also the fifth decline in the last six months.
A separate survey released Wednesday by the Royal Bank of Canada also pointed to a sharp drop in consumer confidence.
Both indicators come as Canadians deal with higher prices for gasoline, food and clothing, not to mention record debt loads spurred by ultra-low interest rates, as well as stock market turmoil that has eroded nest eggs amid signs of slowing economic growth.
"We don't view it as terribly surprising, though it is disappointing," Craig Wright, senior vice-president and chief economist at RBC, said of the drop in confidence levels.
"If you look at the economic environment of late and all the doom and gloom out there and talk of double dip recession and Europe default and the like, obviously consumers are picking up on that negative sentiment."
Consumers surveyed between Oct. 6 and Oct. 16 by the Conference Board showed a surprising level of optimism about future job creation, but that was not enough to buoy overall confidence.
Only 36 per cent of respondents believed now is a good time to make a major purchase — the fewest number since early 2009, said Todd Crawford, an economist with the Conference Board.
"It's a worrisome trend for the Canadian economy because it's a good way to gauge where consumer spending is going to head over the next six to 12 months," Crawford said.
Canadians appear to be in a "holding pattern" as they wait to see how the external factors weighing on sentiment — debt crises in Europe and the U.S. and signs of slower growth in Asia — play out, he said.
Cash-strapped Canadians from job seekers to retirees are worried about tougher times ahead.
Goldie Acton, a senior on a fixed income, has noticed worrying trends in inflation and savings rates, as well everyday expenses like the increasing price of the groceries she had just bought at a downtown Toronto supermarket.
"I just buy stuff on sale," she said.
Allysia Marsman, an unemployed 20-year-old, said she's had occasional cleaning jobs, but can't find anything more permanent. Without a job, it's difficult to afford to live in Toronto, let alone think about saving, she said.
"I just feel like everything is getting more difficult ... (public transit), everything, is just more expensive."
Consumer confidence in Ontario and B.C. — where rapidly rising home prices are eating up a bigger portion of household income — declined the most in the Conference Board study, by seven points or more. Meanwhile, consumers in the Prairie provinces indicated improved confidence, and the index there sits at 97 points.
Economists watch consumer confidence closely because household spending accounts for more than half of overall economic activity in Canada. However, it can be an unreliable indicator because it relies on what people say about their intentions rather than their actual behaviour.
For example, data released Tuesday showed that retail sales improved by 0.5 per cent in August even as the confidence index fell to a then two-year low.
Many Canadians may not be aware of how macroeconomic factors like European debt relate to their own finances, but consumers do understand that worldwide economic crises can take a toll on Canada's economy, said Michael Mulvey, assistant professor of marketing at the University of Ottawa.
"I don't think you have to be an economist to realize that things aren't going all that well right now and it's not going to change," he said.
The Bank of Canada has lowered its projection of Canadian growth to 2.1 per cent this year and 1.9 per cent next year.
However, the bank said Wednesday that household spending will continue to grow, albeit more moderately than previously thought, given the hit to incomes, wealth and confidence from market turmoil.
Slower growth could put pressure on hiring as well as household finances, spelling trouble for Canadians who have taken advantage of record low interest rates to amass record levels of debt.
In another disconcerting sign, the RBC report found that more than half of Canadians surveyed have no savings set aside for a rainy day and many who do dip into them to help pay for everyday expenses.
Some consumers might be relying on credit cards, rather than savings, as an emergency fund, Mulvey said.
"A lot of people have already dipped into their credit for emergencies that have already transpired and there's nothing left there to go back to the well, so I think a lot of people might be at a tipping point right now."
However, the RBC survey also suggested that Canadians are "very focused" on finding ways to manage their finances. Over the next 12 months, 33 per cent said they planned to reduce debt, 30 per cent intended to spend less, 21 per cent expected to save or invest more and 21 per cent planned to do all of the above.
RBC's confidence index, compiled between Sept. 26 and Oct. 3, was at 70 points, down 24 points from last quarter to its lowest level since the bank began tracking sentiment in late 2009.
Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have been warning for months that Canadians have been racking up more debt than they can sustain as a result of a long period of ultra-low interest rates and sluggish price inflation.
Many economists believe the Bank of Canada won't raise rates until late next year or into early 2013 because of the weak economy and downward pressures on inflation, although Carney himself refused to provide rate guidance during a news conference on Wednesday.