Canada: Auto Sales Drive Retail Sales Growth in May, But Momentum is Fading

Retail sales rose 0.2% month-on-month (m/m) in May, weaker than the Statistics Canada’s advanced estimate of 0.5%. April’s print was revised down slightly to 1.0% m/m from 1.1% reported originally.

Adjusting for the inflation, the volume of retail sales was 0.1% higher on the month.

As expected, sales at motor vehicle and parts dealers were strong, gaining 0.8% m/m and accounting for all of today’s headline growth.

Receipts at gasoline stations and fuel vendors were flat on the month thanks to lower prices at the pump. Meanwhile, April’s reading was revised down to -0.4% m/m from +0.3% m/m reported earlier.

Excluding these volatile categories, core retail sales were flat in May, below the consensus estimates of a 0.2% m/m increase.

Gains at electronics and appliance stores (+2.3% m/m), food and beverage (+1.0% m/m), and miscellaneous store retailers (+1.3%m/m) were offset by declines at furniture and home furnishings (-1.6% m/m), building materials and garden equipment dealers (-1.5% m/m), clothing and clothing accessories (-0.8% m/m) general merchandise retailers (-0.7% m/m).

E-commerce sales, which are not included in the headline tally, grew 2.1% m/m after a sizeable decline in April.

Statistics Canada’s advanced estimate points to another flat reading in June.

Key Implications

May brought a sizeable deceleration in retail spending growth. The only sector that points to a decisive gain is auto sales, where both nominal and unit sales were up. The rest of the categories are a mixed bag that points to consumers prioritizing spending on groceries at an expense of discretionary purchases. In real terms, second quarter real consumer spending is now tracking just slightly below 1.0% quarter-on-quarter (annualized).

The “greater persistence of excess demand” remains a challenge for the Bank of Canada. The Bank expects that household consumption will slow over the course of next year as additional hikes work its way through the economy. With today’s reading, there is evidence that this slowdown is materializing. Still, consumers have financial resources in the form of excess savings, so the path to moderation may not be a smooth one. For now, we expect that monetary policy will remain restrictive until after the first quarter of 2024.