Canada: Retail sales relatively flat over the last two months – RBC

Paul Ferley, Assistant Chief Economist at RBC Economics, suggests that the market expectations were for a much stronger 0.5% nominal gain in Canada’s retail sales, largely premised on earlier indications of a jump in unit auto sales that was reflected in sales at motor vehicle and parts dealerships jumping 2.0% in the month.

Key Quotes

“Sales at service stations were unexpectedly strong rising 1.8%.

Sales at food stores provided a major offset dropping 1.5% in June though this followed a 2.3% increase in May. Clothing stores were also weak in June dropping 1.7% though this com-ponent also rose strongly in My by 2.9%. More sustained weak-ness was evident in the general merchandise store sales which dropped 1.5% in June following a 1.1% drop in May.

Our Take:

Latest report disappointingly showed nominal retail sales remaining relatively flat over the last two months. Some of the weakness in May reflected the impact of the Alberta wildfires and attendant evacuations contributing to retail sales in that province dropping 1.0%. This weakness in Alberta persisted in June with retail sales dropping again albeit by a more moderate 0.4%. Some offset in June was provided by a 0.2% gain in British Columbia. Retail sales in Ontario were relatively flat in both June (0.0%) and May (-0.1%).

The decrease in the volume of June retail sales implies a source of downward pressure overall June GDP. However, it is expected to be offset by a recovery in oil sands production that was largely curtailed in May due to the wildfires. This factor is projected to help send June GDP up 0.4% in the month. This increase along with a further 1/2% gain in July will offset May’s 0.6% plunge. These increases are consistent with our expectation that Q3 GDP will rise a strong 3.7% after an expected 1.5% decline in Q2. Given our expectation of growth is in line with the central bank’s forecast of a 1% drop in Q2 followed by a 3.5% gain in Q3, the overnight rate is expected to remain unchanged at 0.50% through the end of this year.”