Canadian Consumers Pull Back on Spending Amid High Prices and Interest Rates, Experts Say

Canadian consumers are pulling back on spending as rising prices and high interest rates appear to be taking a toll on retail sales. Retail sales slipped 0.2% to $66.3 billion in February amid a drop in spending at general merchandise stores and gasoline stations and fuel vendors, Statistics Canada said. The early estimate for March also points to an even steeper decline of 1.4%, though the agency cautioned the figure would be revised.

“We’re starting to see consumers tighten their belts,” retail analyst Bruce Winder said. “Canadian consumers are incredibly cautious right now.”

Economists have warned of a lag between rising prices and high interest rates and the affect on the economy. While the Bank of Canada held its key lending rate at 4.50% at its most recent rate decision, it is up from 0.25% at the start of 2022.

“It is clear that consumer spending behaviour has been impacted by the rapid rise in interest rates even as the economy as a whole has generally outperformed expectations,” Andrew Grantham, senior economist with CIBC Capital Markets, said in a client note.

Still, the pull back in consumer spending could help ease inflation even further, he said. “This sluggishness in spending should help keep goods price inflation under control (assuming supply chain issues don’t worsen again), allowing the Bank of Canada to stay on hold for the remainder of this year before gradual cuts start early in 2024,” Grantham said.

The annual rate of inflation in Canada dropped to 4.3% in March, but grocery prices climbed 9.7% on a year-over-year basis, Statistics Canada said.

For February, retail sales were down in four of the nine subsectors as sales at gasoline stations and fuel vendors fell 5.0% for the month and general merchandise retailers lost 1.6%. Building material and garden equipment and supplies dealers saw 0.2% growth. 

Core retail sales — which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers — increased 0.1% helped by a 4.4 % gain in sales at clothing, clothing accessories, shoes, jewelry, luggage and leather goods retailers.

“Consumers are picking are choosing where they cut spending,” Winder said. “More companies are quietly nudging workers back into the office, so that could be helping spending in some areas.”

In volume terms, a measure that adjusts for the impact of inflation, overall retail sales fell 0.7% in February.

The Bank of Canada’s business outlook and consumer expectations surveys released earlier in April found that the economy has been relatively resilient amid high interest rates but that’s expected to change in the coming months. With a potential recession looming, the surveys showed consumers expect to pull back on spending and businesses anticipate sales will slow. The Bank of Canada found almost half of firms have adjusted their business plans to account for a recession while consumers are planning to spend less on activities such as travel and going to restaurants over the next year.

Source: Globe and Mail
Source: The Star
Source: Statistics Canada

U.S. Retail Sales Fell 1% in March Amid High Inflation, Rising Interest Rates

Americans cut their spending at retail stores in March for the second straight month, a sign consumers are becoming more cautious after a burst of spending in January. Retail sales dropped 1% in March from February, a sharper decline than the 0.2% fall in the previous month. Sales jumped 3.1% in January, as unusually warm weather and a big jump in Social Security benefits likely spurred more spending.

Sales fell among most retailers, including at auto dealers, gas stations, electronics stores, and home and garden stores. Gas-station sales plunged 5.5% in March, though the data isn’t adjusted for price changes, and gas prices fell last month. Excluding car dealers and gas stations, retail sales fell a less-dramatic 0.3%. Spending jumped 1.9% at online retailers and ticked up 0.1% at restaurants and bars.

The decline in sales adds to other recent evidence that the economy is cooling as consumers grapple with higher interest rates and the impact of a year-long bout of elevated inflation. Companies are posting fewer open jobs, hiring has slowed even as it remains solid, and layoffs have ticked up.

The slowdown in spending has fuelled fears that the economy could be nearing a recession. Growth likely reached about 2% at an annual rate in the first three months of this year, but falling retail sales suggest that consumers, who power about two-thirds of economic activity, are losing momentum. If consumers remain weak, the economy could even contract in the April-June quarter, economists said.

“The cumulative effect of historically high inflation, rising interest rates, and reduced access to credit is already taking a toll on consumers’ ability and willingness to spend,” said Lydia Boussour, senior economist at EY Parthenon. “The consumer engine lost significant momentum as the (first) quarter progressed, setting the stage for weak consumption growth in the second quarter.

In addition, economists are closely watching to see if banks pull back on lending in the wake of the collapse of two large banks last month. Many smaller banks have lost deposits to larger competitors, which could force them to offer fewer loans to consumers and businesses. That could further weaken growth.

Minutes of the Federal Reserve’s March 21-22 meeting revealed that the central bank’s staff economists are now forecasting a “mild recession” later in 2023, in large part because the potential for a reduction in lending to weigh on growth. Still, consumers could rebound in coming months as businesses are adding jobs and wages have been rising at a historically rapid pace. 

Economists at Bank of America have calculated that smaller tax refunds in March likely held back spending last month. In an analysis of card spending by its customers, Bank of America found that spending in many areas rebounded in late March, including for airline tickets, entertainment, dining out, and groceries.

Source: Globe and Mail