Retail Sales Down 0.3% in June as Canadians Continue to Grapple with High Interest Rates 

Retail sales shrank 0.3 per cent to $65.7 billion in June, but an early estimate points to 0.6 per cent growth in July, according to Statistics Canada. Despite that, economists say a modest rebound in consumer demand is unlikely to prevent the Bank of Canada from making more interest rate cuts this year.  “It will take time to see a more meaningful recovery amid monetary easing,” BMO Capital Markets economist Shelly Kaushik said in a note.

Retail sales decreased in seven provinces in June. The largest provincial decrease was observed in Ontario (-0.4%), led by lower sales at motor vehicle and parts dealers. In the census metropolitan area of Toronto, sales were up 0.3%. In Manitoba, retail sales decreased 2.2% in June, led by lower sales at motor vehicle and parts dealers. The largest provincial increase in retail sales in June was observed in Newfoundland and Labrador (+0.2%). This increase was led by higher sales at gasoline stations and fuel vendors. Despite a 0.6% increase in sales between May to June 2024, Building material and garden equipment and supplies dealers saw a year to year decrease in sales of -1.5%.

Retail sales fell largely due to high interest rates in Canada. Sales at new car dealers and motor vehicle and parts dealers fell by 2.1% and 0.6% respectively. The drop can be attributed to a software glitch at car dealerships, but financial headwinds also contributed to the decline. Bank of Montreal economist Shelly Kaushik noted that spending remained soft in the second quarter as consumers struggled under the weight of elevated interest rates.

The Bank of Canada lowered its key interest rate to 4.75 per cent in June and again to 4.5% in July. Higher rates often dampen consumer spending because they tend to move in tandem with mortgage rates. Katherine Judge of CIBC Economics noted that sales were down in four of nine sub-sectors, with discretionary categories such as sporting goods/hobby/miscellaneous falling 0.8% and gas station sales decreasing by 0.5% due to lower pump prices.

Core retail sales rose 0.4% in June, while food and beverage retailers reported sales increasing 1.2%. Overall retail sales increased 0.1% in volume terms in June. Statistics Canada’s advance estimate of retail sales for July pointed to an increase of 0.6% for the month, but cautioned that the figure would be revised.

Tu Nguyen, an economist at RSM Canada LLP, said consumers are still treading lightly when it comes to discretionary spending.

“One major headwind is housing costs, including both rents and mortgage interest payments,” she said in an email. “As mortgages come up for renewal at much higher rates, a jump in housing costs means that households have less money left for discretionary purchases.”  CIBC Capital Markets economist Katherine Judge agrees, noting retail sales were still down 0.5 per cent in the second quarter.

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

Canada’s Economy Grew at 2.1% Annual Pace in Second Quarter; Per-Capita Household Spending Drops

Statistics Canada reported that the economy grew at an annualized rate of 2.1% in the second quarter, beating the Bank of Canada’s forecast. However, real gross domestic product continued to shrink on a per-person basis, marking the fifth consecutive decline. The economy also halted towards the end of the quarter as real GDP per capita remained unchanged for June and July.

“Growth in the Canadian economy was modestly better than expected in Q2, but weak momentum heading into the third quarter gives ample reason for the BoC to continue cutting interest rates,” CIBC senior economist Andrew Grantham said in a client note.

Governor Tiff Macklem said at the past interest-rate announcement that the central bank was cutting interest rates in part to help the economy bounce back. If inflation continued to slow, it would be reasonable to expect the Bank of Canada to continue lowering its policy rate.

Although high interest rates have not pushed the economy into a recession, economic growth continues to lag strong population growth. The latest GDP report suggested that growth in the second quarter was largely driven by government spending, rather than a broad-based increase in activity. The economy posted declines in exports, residential construction, and household spending on goods.

Many forecasters expect these rate cuts to continue throughout the fall. The Bank of Canada is particularly concerned about weakness in the labour market as the unemployment rate keeps trending higher. Canada’s unemployment rate was 6.4% in July, with youth and recent immigrants disproportionately affected by the slowing job market. High interest rates have also dampened household spending, with per-capita household spending falling by 0.4% in the second quarter.

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