The resilience of Canadian consumers has been put to the test as the first half of the year came to a close. This suggests that consumption is no longer driving growth, which has led to discussions about whether interest rates are now high enough to address concerns about inflation.
In June, retail sales experienced a slight increase for the second consecutive month. The boost was primarily due to car dealerships compensating for weakness seen in other areas, resulting in overall flat sales volumes.
According to Statistics Canada, sales rose by 0.1% in June compared to the previous month, reaching a seasonally adjusted total of 65.92 billion Canadian dollars (approximately $48.64 billion). This exceeded last month’s preliminary estimate, which projected no change in sales. It also follows a similar 0.1% increase in May.
However, when compared to June of the previous year, sales were actually 0.6% lower.
While early indications from companies suggest that retail sales increased by 0.4% in July compared to the previous month, it’s important to note that this figure is based on a response rate of less than half and is subject to revision, according to the data agency.
Although price pressures for Canadian consumers have been gradually easing since peaking last summer, costs for items like groceries remain high. The Bank of Canada has warned that the downward momentum in inflation has slowed. In response, the bank raised its policy rate by one-quarter of a percentage point in both June and July, bringing it to a 22-year high of 5%. The bank has also made it clear that further increases are still on the table.
In terms of volume, price-adjusted retail sales in June dipped by 0.2% compared to the previous month. This suggests a potential obstacle for industry-level gross domestic product, which Statistics Canada has forecasted to have contracted by 0.2% in June.
Overall, retail sales in the second quarter remained unchanged and experienced a 0.8% decrease in volume terms.
The Bank of Canada Considers Rate Hikes Amid Consumer Slowdown
Introduction
Second Quarter GDP Growth
Despite a slightly lower second quarter GDP growth rate, Katherine Judge, senior economist at CIBC Capital Markets, expects one final quarter-point increase in interest rates in September. However, this decision is dependent on the GDP data to be released next week.
Impacts on Sales Volumes
Retail sales in June saw modest growth, driven by increased automotive sales. New car dealers experienced three consecutive months of higher sales. Conversely, sales at automotive parts, accessories, and tire stores declined. Gasoline stations and fuel vendors also saw increased sales due to higher prices at the pump.
When excluding gas stations and motor-vehicle and parts dealers, Canadian core retail sales experienced a 0.9% decrease from May.
Declines in Specific Sectors
General merchandise stores and food and beverage retailers witnessed the largest drops in sales volumes. Decreased sales of beer, wine, and liquor contributed to this decline. Receipts at supermarkets and grocery stores also faltered in June, dropping by 0.4% after six months of consecutive increases.
Factors Influencing Sales Weakness
Stephen Brown, deputy chief North America economist at Capital Economics, attributes some of the weakness in sales volumes to wildfires across the country. However, the bulk of the decline appears to be influenced by high interest rates which continue to impact consumer behavior. With retail sales volumes stagnating, it may become increasingly challenging for the Bank of Canada to justify raising interest rates further.
In conclusion, while economic growth remains a priority, the Bank of Canada must carefully evaluate the current state of the economy, particularly consumer spending, before making any decisions regarding interest rates.
