Economics
Retail sales continue to gain ground
Latest available: May 2008
Release date: July 22, 2008
Retail sales continued to rise in May, although by a more moderate 0.4% compared to the 0.6% gain in April. Market expectations had been for growth in May to match the April increase. The optimism for nominal sales in May had been largely based on rising gasoline prices that pushed sales at service stations up 2.4% in the month. Excluding the effect of all price increases, including gasoline, the volume of retail sales rose a more moderate 0.1% following the 0.4% gain in April.
Most components of retail sales rose in the month, with increases in five of the eight major categories. The strongest increase was in the automotive component (up 1.1%) helped by the price-related strength in service stations, but solid gains were also recorded in building and home supply stores (up 0.7%) and miscellaneous retailers (up 0.4%). The only two components that declined, clothing stores by 0.7% and general merchandise stores by 0.2%, followed robust increases in April of 2.7% and 2.0%, respectively. One component, food and beverage stores, had unchanged sales activity in the month.
The gain in the volume of retail sales in May is encouraging on top of increases in the volume of manufacturing sales (up 0.2%) and wholesale trade (up 0.3%) in May. This augurs well for overall GDP building further on April's hefty 0.4% increase, with output likely rising 0.1% in May. This is consistent with our forecast that GDP growth will return to the positive column in the second quarter, rising an annualized 1.5% after the 0.3% annualized decline in the first quarter.
Although our projected second-quarter growth rate is stronger than the 0.8% expected by the Bank of Canada, it still represents relatively weak growth. With further strengthening over the second half of this year far from assured given the recent re-emergence of weakness in financial markets and attendant tightening in credit, the central bank is expected to remain on the sidelines through the remainder of this year, holding the overnight rate steady at a still-stimulative 3.00% despite growing concerns about inflation pressures building in the system.
Motor vehicle sales post strong gain in first quarter
Latest available: March 2008
Release date: May 16, 2008
Motor vehicles sales posted a strong gain in the first quarter, rising 7.9% relative to the average pace in the fourth quarter of last year. The rise reflected a very robust rise in January with sales in both February and March faltering. In March sales slipped by 0.5%, a slower pace of decline than February's 3.1% dip. The one percentage point cut to the Goods and Services Tax, falling prices and manufacturers' incentive plans and rebates supported the strong first quarter performance. The March CPI report showed that prices for purchasing and leasing vehicles were 7.1% lower in March 2008 than a year earlier reflecting dealer incentives and lower list prices compared with March 2007.
Wholesale sales pick up
Latest available: March 2008
Release date: May 20, 2008
Canadian wholesalers saw sales increase by 0.6% in March partially reversing February's large 2.1% decline. The report was largely in line with market forecasts. Wholesale sales volumes, which account for price changes, edged down by 0.1% following February's 2% drop and resulting in a negative quarterly performance, with sales falling at a 4.5% annual rate relative to Q4 2007.
In March, five of the seven major categories showed higher sales. The largest gains were reported in machinery and electronic equipment and building materials. The automotive category showed a modest 0.5% increase although on a quarterly basis, sales were down for the fourth quarter running. The other products category, which includes agricultural chemicals, posted a small decline in March but still posted its strongest quarterly gain in five years.
March's data reports were a mixed bag with the labour market still tight, retail spending likely firmer but manufacturing and wholesale trade weaker after price changes were taken into account. On balance, the data points to Canada's economy on track for another sub-potential quarter for growth. The Bank maintained its easing bias in April and we look for an additional 25 basis point rate cut in the months ahead as a measure of insurance that policy is stimulative enough to sustain Canada's domestic economy in the face of a widening trade drag.
Broad-based decline in February retail sales
Latest available: February 2008
Release date: April 23, 2008
Retail sales fell 0.7% in February, much weaker than market forecasts for a 0.1% increase and more in line with RBC's call for a 0.3% decline. Almost all major sales categories posted declines. Sales by new car dealers fell 1.7% with used cars, recreational vehicles and parts dealers seeing a big 2.8% drop in sales.
Excluding autos and parts, sales were also softer-than-expected, falling 0.3%, contrary to forecasts for a 0.4% gain. After price changes were taken into account, sales fell 0.7% but were 5.3% higher than a year earlier.
The broad-based decline in sales activity was headlined by the fall in the automotive sector, but there were also big monthly declines reported by clothing stores, pharmacies, miscellaneous retailers and furniture stores. Sales at food and beverage stores were flat. Five of 10 provinces reported lower sales. Sales in Ontario fell by 1.6% and StatsCan suggested that winter storms and the Family Day holiday may have affected activity in February.
While both the retail and wholesale sales reports for February were disappointing, employment, housing starts and manufacturing sales posted healthy gains, pointing to another month of positive GDP growth, albeit at a more moderate pace than January's strong 0.6% increase. Our estimate is that the economy eked out a 0.1% gain in February which, combined with January's strong performance, still keeps our forecast that the economy recorded a 1.2% annualized growth rate on track.
In the statement accompanying yesterday's 50 basis-point rate cut by the Bank of Canada, policymakers characterized Canada's domestic economy as buoyant, backed by the improved terms of trade and strong labour market. Retail activity during January and February supports this view. Sales, after price changes are taken into account, increased at 5.1% annualized pace in the first two months of the year, although the weakening in February will keep the Bank wary about how the tightening in credit conditions will affect the consumer outlook going forward. More moderate consumer spending combined with the persistent drag coming from net exports will likely result in Canada's economy growing by 1.6% this year, much slower than last year's 2.7% pace.
The Bank's actions yesterday show their commitment to mitigating the downside risks to the economy. The Bank statement signalled that they are in data-watching mode as they assess the impact of the 150 basis points of rate cuts on the economy. We reckon that yesterday's statement left the door open to further easing, although it is likely to be limited. We look for just one more 25 basis-point rate cut in the months ahead, which will get the overnight rate to a stimulative 2.75%, enough to resuscitate the economy in the second half of the year.
