By Canadian consumers appear to have scaled back their spending habits following a strong surge in retail purchases during the holiday season. This decline may indicate the financial strain that households are facing due to high interest rates.
Retail Sales Report
An early estimate of retail sales receipts reports a 0.4% decrease last month, as disclosed by Canada on Thursday. This comes after a noteworthy 0.9% increase in December, reaching a seasonally adjusted 67.30 billion Canadian dollars (around $49.84 billion).
Economic Impact
The decline in retail sales for January, based on responses from nearly 53% of retailers surveyed, marks the most significant drop in nine months. This slowdown in consumer spending is contributing to the overall economic growth deceleration. Caution among consumers and businesses has heightened following the aggressive rate hikes by the central bank to combat inflation.
Positive Contribution to GDP
Despite the recent decline, retail sales have been a strong contributor to gross domestic product at the end of 2023. The December sales increase was the most robust since April, surpassing both Statistics Canada’s 0.8% forecast and economists’ expectations.
Segment Analysis
Sales were strong in five out of nine retail segments tracked by the data agency, particularly led by motor vehicle and parts dealers. In terms of volume, total retail sales rose by 0.8%. Notably, new car sales were prominent in driving growth within the vehicle and parts segment, which has experienced a four-month consecutive increase.
Overall, while consumer spending may be showing signs of moderation, retail sales continue to play a crucial role in economic developments in Canada.
Retail Sales Performance in Canada
Core retail sales, excluding gas stations and car/auto-parts dealers, saw a modest increase of 0.5% from November. This growth was fueled by general merchandise retailers and supermarkets, although it was offset by declines in furniture, home furnishings, electronics, and appliances.
Strong Finish for 2023
In the final quarter of 2023, headline retail sales in Canada rose by 1.0%, marking a second consecutive quarterly increase. Volume sales also saw a jump of 1.3% for the quarter, following positive trends in wholesale trade.
Outlook for GDP and Monetary Policy
Official GDP data is expected later this month, indicating industry-level growth of 1.2% annualized for the fourth quarter. The Bank of Canada is likely to maintain its benchmark interest rate at a two-decade high during its upcoming meeting on March 6. Despite projections of near-zero growth in the short term due to high rates restricting spending and soft business investments, annual inflation is forecasted to remain above the 2% target.
Retail Sales Overview
Canadian retailers closed out the year with total sales of approximately C$794.4 billion, showing a 2.2% increase from 2022. Growth was primarily driven by vehicle parts dealers and improvements in supply chains and inventories. While food and beverage retailers, as well as health and personal care stores, experienced growth, there were declines in sales at gas stations and fuel vendors.
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