Canadians Extend Holiday Spending after Period of Cutbacks

The latest figures released by Statistics Canada indicate that Canadians have increased their spending during the holiday season, following a period of reduced expenditure at retailers. This mixed signal poses a challenge for central bank policymakers as they approach their upcoming rate decision.

Based on an advance estimate of receipts, retail sales rose by 0.8% in December. The figure for November showed a slight decline of 0.2%, reaching a seasonally adjusted 66.61 billion Canadian dollars ($49.38 billion). However, when compared to the previous year, retail sales in November showed a positive growth of 1.8%.

It is important to note that the estimate for December sales is based on data collected from slightly under half of the retailers surveyed. This figure may be revised, but if it holds true, it would represent the strongest performance since April. Furthermore, it suggests that Canadian households displayed resilience throughout the year despite facing higher interest rates and persistent inflation, with retail sales averaging a 2.2% increase from 2022.

However, the decline in spending observed in November contrasts with economists’ expectations of flat sales, as well as the forecast provided by Statistics Canada’s initial estimate. The drop in sales follows two consecutive months of 0.5% increases. This highlights the hesitancy among consumers, who have expressed intentions to reduce their expenditure due to growing concerns about economic conditions, according to a recent Bank of Canada survey.

Of the nine subsectors tracked by Statistics Canada, four experienced lower sales in November. The food and beverage retail sector witnessed a decline of 1.4% month-over-month, leading this downward trend.

When excluding gasoline stations, motor vehicle and parts dealers, the decline in core retail sales was even more pronounced, reaching 0.6% compared to October.

In terms of volume adjustments for price changes, sales slipped by 0.2% in the month of November.

Shelly Kaushik, an economist at the Bank of Montreal, expressed disappointment with the overall drop in retail sales. She states, “Weak sales volumes point to an economy that remained stagnant in November as consumers continue to adapt to a higher interest rate environment.”

Canadian Retail Data Shows Signs of Growth in Consumer Spending

The release of the latest retail data in Canada serves as a crucial indicator for the upcoming release of industry-level Gross Domestic Product (GDP) figures for November. While the Bank of Canada’s decision on interest rates is set to take place this Wednesday, economists predict that the central bank will maintain its benchmark rate, waiting for further signs of sustainable inflation decline. However, markets are already pricing in a potential rate cut as early as this spring.

Although the economy experienced contraction in the third quarter on an annualized basis, experts anticipate minimal growth in the final three months of the year. Fortunately, there have been positive developments within the retail sector. Factory sales and wholesale trade both saw an increase in November, recovering from the previous month’s decline. This rebound indicates that consumer spending has contributed positively to the economy during this quarter.

Katherine Judge, a senior economist at CIBC Capital Markets, believes that consumer spending made a significant impact on fourth-quarter growth after stagnation in the previous quarter. However, Judge does not expect this momentum to persist due to concerns about job prospects and mortgage renewals among households, which may limit spending early in the new year.

A closer look at retail receipts for November reveals that Canadian consumers reduced their spending at grocery stores and supermarkets while also cutting back on purchases of beer, wine, and liquor. Sales at general merchandise stores declined, but there was an increase in sales at clothing and accessories retailers, as well as jewelry and leather goods retailers.

Interestingly, sales at motor vehicle and parts dealers experienced a third consecutive month of growth, rising 0.5% from October, despite a decline in trade at used car dealerships. Additionally, sales at gas stations and fuel vendors increased thanks to a significant rise in volumes.

Overall, while there are positive signs of growth in consumer spending within the Canadian retail sector, concerns about job prospects and mortgage renewals may dampen future momentum. These factors will continue to be closely monitored as the year progresses.