Retail Sector Cools

Retail spending continued to slow slightly in June, suggesting the Canadian economy has cooled a bit in the first half of the year.

Retail sales for June fell by 0.4%, Statistics Canada reported on Wednesday, but this isn't necessarily cause for alarm, points out David Watt, chief economist with HSBC Bank Canada. In inflation-adjusted terms sales were down 0.1% month over month, suggesting retail results didn't retreat quite as much as headline numbers suggest.

Even with sales figures in real terms, it's evident the retail sector has lost the momentum it had for the past few years. Watt says retail activity in Canada looks to have peaked at about $39 billion, but that activity stalled between November of last year and this past March. It's clear Canadians are becoming thriftier and increasingly price conscious amid global and domestic economic uncertainty, says Watt. "As a result,  the upswing in retail sales that had been in place since late 2008 seems to have run out of steam."

The first quarter of 2012 saw a modest retail sales decline of 0.1%, while the second quarter experienced a dip of 2% (based on three-month over three-month analysis, annualized). "This development is unfolding at a time when the Bank of Canada presumes consumption and business investment are expected to be primary drivers of growth," points out Watt.

"Consumer spending trends are going to depend heavily on job creation and growth in labour income," says Watt. "In turn, this depends on Canadian businesses remaining optimistic about future prospects."

Watt anticipates Canadians will experience a bounce in retail activity to begin the third quarter of 2012, given aggressive discounting in July and an upswing in consumer confidence following a sharp drop in June. But he cautions even with an increase to start the third quarter, the recent slowdown in the pace of hiring suggests Canadian retail spending trends will remain muted.

"Small businesses need to be aware that Canadian households are poised in coming months and quarters to decrease debt and increase savings, highlighting that moderate spending patterns will remain in place," says Watt. He adds he expects the Bank of Canada to maintain the status quo for now while paying particularly close attention to Canadian business sector sentiment, job creation and investment.