Canadian shoppers finally seem to be feeling the pressure of higher interest rates, according to the latest retail spending data from Statistics Canada.
Retail sales, which indicate how much consumers are spending on goods, rose by a modest 0.1 per cent month-over-month in June, just slightly better than economists’ expectation of no increase. In volume terms, retail sales actually declined 0.2 per cent.
That was the second consecutive month of slower growth, after May retail sales were little changed, up just 0.2 per cent, after strong gains in April.
Consumer spending was surprisingly strong in the first quarter of 2023 and into the spring, shocking central bankers and economists alike for its resilience in the face of higher borrowing costs. Now, however, consumers are showing signs of retreating – with a notable pullback in goods spending in recent months. Spending on services remains relatively strong.
The pullback from shoppers, combined with a softening in the labour market, suggests the Bank of Canada’s rate hikes are finally doing what they were intended to do: cool the economy.
“While the ongoing wildfires across the country may explain some of the weakness, the bulk of the weakness appears to reflect the negative impact of higher interest rates, which are still feeding through,” Stephen Brown, deputy chief economist with Capital Economics, said in a note to clients.
The small increase in June was led mainly by auto purchases, as sales from motor vehicle and parts dealers edged 2.5 per cent higher, while sales at new-car dealers rose 2.9 per cent.
Excluding gas stations, fuel vendors and motor vehicle dealers, retail sales dropped 0.9 per cent month-to-month. Sectors such as general merchandise and food and beverage retailers saw the largest declines. Receipts at supermarkets and other grocery retailers also showed signs of slowing after six months of monthly increases.
In an interview, Mr. Brown said the granular data reflect just how the average Canadian consumer is suffering from higher costs across the board, as the jump in auto sales reflects activity from a smaller subset of the population, given that cars are big-ticket items.
Statistics Canada’s advance indicator suggests retail sales in July ticked up slightly, by 0.4 per cent, but that number is still subject to revisions.
Canada’s annual inflation rate has proven sticky, rising to 3.3 per cent in July, despite the Bank of Canada’s year-and-a-half-long campaign to get it back to its 2-per-cent target by aggressively raising interest rates. In July, the central bank increased its benchmark rate by 25 basis points, to 5 per cent. Most economists say the latest retail figures point to slower GDP growth for the second quarter, suggesting rate hikes may be nearing the end.
The latest retail numbers “will probably leave central bankers comfortable keeping rates on hold for the remainder of the year,” Tiago Figueiredo, an economist with Desjardins, said in a note to clients.
Mr. Brown believes central bankers will give less weight to inflation data, as they tend to lag behind economic activity. He added that there has been improvement in the balance of supply and demand in the economy and the labour market.
The next interest-rate decision is set for Sept. 6.
Meanwhile, one economist remains cautious, pointing out that consumers are spending more than the retail numbers indicate, as they don’t consider the shift in spending from goods to services.
“Total consumption has posted solid trend growth. The gap is explained by the rotation toward services spending that is not captured in retail sales one bit in Canada given how Statcan defines them,” Derek Holt, vice-president and head of capital markets economics at Bank of Nova Scotia, said in a note to clients.
“We see this macroeconomic trend being reinforced by earnings reports as companies serving the nondurable consumption sector have underperformed companies like airlines.”