OTTAWA – Canadian consumers are facing challenges as higher interest rates and persistent inflation continue to impact their spending habits.
In May, retail sales in the country rose less than expected, and the subsequent month’s advance estimate indicates a flatlining of sales. This suggests that consumers’ resilience may be waning. While May saw a slight increase in sales driven by higher vehicle purchases, when excluding this factor, overall sales remained steady.
According to Statistics Canada, retail sales rose by 0.2% to a seasonally adjusted 66.03 billion Canadian dollars (approximately $50.13 billion) compared to the previous month. This figure falls short of the data agency’s initial estimate for a 0.5% month-on-month increase and April’s 1.0% advance, which was revised downward by 0.1 percentage point.
On a year-on-year basis, sales in May were 0.5% higher.
Statistics Canada reports that early indications from companies suggest that retail sales remained unchanged in June. However, these figures are based on responses from just under half of the surveyed companies and are subject to revision.
Economist Shelly Kaushik from BMO Economics explains, “The Canadian consumer appears to be losing momentum. The advance figure for June suggests that consumer spending experienced a significant decline in the second quarter of the year, setting the stage for weaker momentum in the second half of 2023.”
While inflation peaked last summer, price pressures for Canadian consumers have gradually eased. However, some essential items like groceries continue to experience elevated costs. In June, annual inflation cooled to 2.8% from the previous month’s 3.4%, partially due to a substantial drop in gasoline prices compared to the same period last year.
Bank of Canada Raises Policy Rate to Highest Level in 22 Years
The Bank of Canada has recently increased its benchmark policy rate by a quarter-point, reaching a 22-year high. This follows a similar rate hike in June, which ended a brief pause on interest rates. The central bank justifies these increases by highlighting the potential risk of inflation slowdown due to continued robust spending by households on goods and services. Several factors contribute to this spending spree, including a strong labor market, population growth, and savings accumulated during the Covid-19 pandemic.
However, Stephen Brown, deputy chief North America economist at Capital Economics, suggests that the recent disruption caused by Canadian wildfire smoke in June may have affected retail sales. Consequently, retail trade appears to be weaker than anticipated by the central bank, which initially believed there was excess demand in the economy. Brown expresses surprise if the Bank of Canada decides to raise interest rates again at its upcoming September meeting.
Data reveals that the rise in retail sales for May was primarily driven by higher receipts at motor-vehicle and parts dealers. Although core retail sales, excluding gasoline stations and vehicle and parts dealers, remained stagnant compared to April.
The increase in spending on food and drink, as well as sporting goods, musical instruments, books, and miscellaneous items, was offset by weaker performance in general merchandise retailers, building materials and garden equipment and supplies dealers, and goods such as clothing, shoes, and jewellery.
Adjusting for price fluctuations, retail sales saw a marginal 0.1% increase on a month-to-month basis.
Desjardins principal economist Marc Desormeaux points out that retail sales momentum is visibly slowing. Weak growth or outright declines have been observed in three out of the past four months, with signs of further softness in June. The recent interest rate increase is expected to exert pressure on Canadian consumers not only in July but also in the coming months.