Canadians hold line on spending as retail sales continue to fall
Retreat follows five straight months of increases
OTTAWA — Canadian consumers are proving to be a hard sell.
Retail purchases are retreating beyond expectations, while weaker price gains — now at almost three-year lows — are not providing a much-needed resurgence in buying that chains, battling for a finite pool of disposable cash, are dearly hoping for. Get used to it. With the economy losing traction and threatening to slip into neutral, don’t expect consumers to pick up the slack — at least not this year, or even next.
“It’s easy to build up a pretty negative case,” said Douglas Porter, chief economist at BMO Capital Markets.
“Exports were down 10 per cent from a year ago. Governments are in restraint mode, consumers are retrenching, housing starts have dropped,” he said.
“Yet, the Bank of Canada and the Finance Department seem to believe that business investment is going to come running to the rescue by itself. That is just not going to happen — not in this kind of environment.”
After five straight months of meagre increases, Statistics Canada said Friday that shoppers dramatically pulled back on their spending in December, with sales falling 2.1 per cent.
That was the largest monthly drop since April 2010, when sales were down 2.4 per cent.
Purchases of new cars led the December decline, falling 7.7 per cent, ending a sixmonth string of advances. Overall, sales at vehicle and auto-parts outlets were down 6.4 per cent for the month.
Together with fewer purchases in other sectors — such as electronics and appliances — tracked by the federal agency, the monthly declines accounted for 58 per cent of all retail activity in Canada.
The drop in seven of the 11 categories during the month — traditionally the prime shopping period — sheds some light on how gains in consumer prices have been weakening throughout 2012.
That trend likely continued in January, although a slight uptick is possible but not sustainable. We won’t find out the exact numbers for that month until March 21.
Inflation data for January, released in a separate report from Statistics Canada on Friday, may have foreshadowed the ongoing weakness in the retail sector last month.
Last month’s rise in overall prices — down from 2.5 per cent in January 2012 — was the smallest since October 2009, when costs rose by just 0.1 per cent.
“Increased competition, particularly as U.S. retailers move aggressively into Canada, has been cited as one key factor weighing on Canadian inflation,” said economist Diana Petramala, at TD Economics.
“With Target stores opening in March and April of this year, price growth for items typically sold at general merchandise stores — like household equipment, clothing and footwear and electronics — is expected to remain under wraps over 2013. Canadians may even continue to enjoy falling prices for such items.”
Price increases, although meagre, were up in six of Statistics Canada’s eight inflation-tracking sectors in January. Helping to hold back the annual pace were gasoline costs, which fell by 1.8 per cent after rising one per cent in December.
When gas is excluded from the 0.5 per cent overall inflation reading, prices were sill only up 0.6 per cent in the 12 months to January. The annual rate in December was 0.8 per cent.
The weaker January gains were primarily due to price declines for clothing — as retailers cut sales prices more aggressively than a year earlier — and slower increases in food bought at retail outlets.
Meanwhile, the core inflation index — stripping out volatile items such as some energy and food products — eased to one per cent in January from an annual pace of 1.1 per cent the previous month.
Economists had expected retail sales to decline by 0.3 per cent and consumer prices overall to slow to between 0.6 per cent and 0.7 per cent. Core inflation estimates were around one per cent.
Considering the Bank of Canada’s inflation target is two per cent, it appears certain that policy-makers will remain shackled to the bank’s near-record low one per cent trend setting interest rate into next year — continuing the holding pattern that began in September 2010.
Looking at the retail sales report, Porter said “obviously there was massive discounting going on in December and, unfortunately, all it was doing was driving down prices and not volumes up.”
“The discounting partly reflected the underlying weakness of the sales environment,” he said. “What little sales there were did get pulled ahead to November. It just accentuated the weakness in December.”
Growth in the country’s overall economy, which the Bank of Canada and the Finance Department forecasts will come in at about two per cent this year — many others are less optimistic — will nonetheless remain weak in the near term.