Canadians have ramped up their retail spending in recent months, despite higher interest rates that are meant to slow their consumption and bring down the rate of inflation. Retail sales rose by 1.1% in April, after a 1.4% slide in March, Statistics Canada said in a report.
The April result easily surpassed its previous estimate of a 0.2% gain. In volume terms, retail sales rose 0.3%. BMO economist Shelly Kaushik said the figures show Canadian consumers continued to spend but “higher prices drove most of the increase as spending volumes rose at a much slower pace.”
Further gains appear to be on the way: In its preliminary estimate, Statscan said retail sales rose an additional 0.5% in May, although that number is subject to revision.
The resilience of the Canadian consumer has been a major theme of the economy this year. Despite a rapid series of rate hikes from the Bank of Canada that began more than a year ago, many households appear to be shrugging off the impact of those higher borrowing costs.
In the first quarter, the Canadian economy expanded at a rapid clip – fuelled in large part by a surge in household spending. This and other strong economic data convinced the Bank of Canada to resume raising interest rates after a brief pause. Earlier this June, the central bank increased its policy rate by 25 basis points to 4.75%, the highest level since 2001. (A basis point is 1/100th of a percentage point.)
After the report, several analysts said the BoC would likely raise its benchmark interest rate by another 25 basis points at its next decision on July 12. The recent increases in retail spending are “not what the Bank of Canada will be looking for as it hopes to slow domestic demand,” Randall Barlett, senior director of Canadian economics at Desjardins Securities, said in a note to clients.
Statscan’s report showed a broad-based increase in retail spending. Sales rose 3.3% at general merchandise retailers in April from March. Receipts were up 3.1% at clothing retailers and by 1.5% at food and beverage retailers. Building material and garden equipment and supplies dealers saw an increase of 0.7%
There was, however, a decline at stores catering to the housing market. For instance, sales fell 1.3% at electronics and appliance retailers in April. While real-estate activity has perked up in the spring, the recent rise in borrowing rates could put further pressure on the sector.
In a recent speech, Bank of Canada deputy governor Paul Beaudry said the central bank was “surprised” by the strength of consumer spending in the early months of 2023.
“We had expected growth in demand for services to start to ease off, but Canadians continue to catch up on travel, entertainment and restaurant spending. More unexpected was the strength of the rebound in goods spending,” Mr. Beaudry said on June 8.
In a summary of deliberations for its June rate decision, the Bank of Canada’s policy-setting governing council pointed to several possible explanations for robust spending. These included the delayed effects of higher interest rates, pent-up demand for services, the easing of supply-chain issues, strong population growth and continued strength in the labour market, among other reasons.
“While it was impossible to declare any one explanation as predominant, members were of the view that with the resurgence in household spending growth, the pickup in consumer confidence, and the slowing in disinflationary momentum, monetary policy did not look to be sufficiently restrictive,” the summary of governing council deliberations read.
In recent months, federal and provincial governments have provided financial assistance to many households, ostensibly to help them with higher living costs. (Economists have criticized some of these measures for supporting consumption and undermining efforts to rein in inflation.)
The Bank of Canada is raising interest rates to reduce demand and wrestle inflation back to its 2% target. In April, the consumer price index rose at an annual rate of 4.4%. While that’s down from a peak of 8.1% in June 2022, the rate ticked up from 4.3% in March.
Members of the bank’s governing council expressed concern that inflation could get stuck “materially” above the 2% target, according to the summary of deliberations. The central bankers “agreed that the economy remained clearly in excess demand and that the rebalancing of supply and demand was likely to take longer than previously expected,” it read. In April, the Bank of Canada projected that inflation would ebb to around 3% in the summer, before returning to its 2% target in late 2024.