Retail Sales in Canada Decline in February Amid Higher Interest Rates and Inflation
Canadian retail sales saw a decline in February, suggesting that consumer demand may be waning due to higher interest rates and persistent inflation. According to Statistics Canada, retail sales fell by 0.6% last month, based on preliminary data from its monthly survey. The February data align with what Toronto-Dominion Bank is seeing, with “spending on goods fell in that month, indicating a decline in retail sales,” said Ksenia Bushmeneva in a note.
However, in January, retail sales rose by 1.4% from the previous month, surpassing analysts’ expectations for an increase of 0.7%. Excluding automobile and gasoline sales, Statistics Canada said sales rose by 0.5%. In volume terms, which adjusts for inflation, retail sales increased by 1.5% in January, the agency said.
In January, sales rose in seven of the nine categories, with cars and car parts, and gasoline leading the pack, up by 3% and 2.9%, respectively. Canadians also spent more on clothing and clothing accessories, with sales up by 2.2%, the largest increase since February 2022, according to Statistics Canada. The increase in sales provided more fuel to estimates that gross domestic product rose by 0.3% month-over-month in January.
The new method implemented by the data agency to measure retail sector activity, which included purchases made through virtual sellers such as Amazon, suggests that the outlook might be cloudy, but the rearview mirror looks good. However, polls have shown repeatedly that higher interest rates and inflation have soured the mood of households, which economists say will eventually show up in weaker demand.
Brown noted that “consumer confidence has recovered since the Bank (of Canada) signaled its ‘conditional pause’ (on rates) in January, but it continues to point to downside risks to the outlook for retail sales volumes.” The Bank of Canada is looking for higher interest to crimp consumption and slow the economy to rein in decades-high inflation.
The latest consumer price index, released on March 21, showed that inflation slowed to 5.2% for February, compared with 5.9% year-over-year in January. However, the chance of recession in Canada has risen, and economists predict that much of the financial “pain” from higher borrowing rates has yet to be felt among Canadian households.
“As such, we continue to expect consumer spending to slow significantly in the second half of this year as this headwind intensifies and the labor market slows,” said Bushmeneva of TD. Preliminary estimates from Statistics Canada also showed a slowdown in February, with wholesale trade falling by 1.6% and manufacturing sales falling by 2.8%.
In conclusion, while January’s retail sales were strong, February’s decline suggests that higher interest rates and persistent inflation may be impacting consumer demand. The implementation of the new method by Statistics Canada may make the outlook for retail sales appear cloudier, but economists warn that the risks to retail sales volumes are still present.
