Canadian retail spending falters in August – RBC Economics

Canada’s retail sales unexpectedly dropped 0.3% in August following a 0.4% gain in July as the decline in the more recent month was relatively broadly based led by a 2.5% plummet in sales at food stores that almost fully reversed cumulative gains over the previous four months, explains Paul Ferley, Assistant Chief Economist at RBC Economics.

Key Quotes

“StatsCan commented on the weakness evident in housing-related sales components with building materials down 1.9% and furniture store sales off 2.4%. Eliminating the impact of overall price changes the volume of retail sales dropped a disappointing 0.7% following the 0.1% decline in July. This represents a sharp shift from the average monthly increase through Q2 of 0.5%. Though the earlier strength will still allow the Q3 consumer spending growth rate to increase, the pace seems likely to drop to 1 1/2% from the 4.7% average gain achieved over the first two quarters of this year.”

“With the Canadian economy likely close to capacity, a slowing in spending from the outsized gains over the first half of the year is likely desirable. The weakening in consumer spending is expected to be mirrored in overall GDP growth moderating to a still above-potential rate of 2.0% though this would be down sharply from the Q2 gain of 4.5%.”

“Latest retail sales report, along with the September inflation numbers also released this morning coming in lower than expected, are consistent with the Bank of Canada likely remaining on the sidelines coming out of next week’s policy meeting leaving the overnight rate unchanged at 1.00%. Our forecast assumes that the central bank will eventually return to a modest pace of tightening though such will await signs of inflation moving closer to target and growth being sustained at or slightly above potential.”

“Highlights:

• August retail sales unexpectedly dropped 0.3% in the month following an unrevised 0.4% gain in July.
• The decline was led by lower sales at food stores and housing-related retailers such as furniture stores.
• E-commerce sales (not all of which are included in the retail sales totals) were up 41.9% over the past year ending in August though their share of retail trade is just 2.3%.”