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Canadian Retail Spending Levels Off Before Holiday Season

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As the holiday season approaches, Canadian retail spending has experienced a flattening trend, indicating that consumers may be hesitating due to high interest rates and signs of a struggling economy. Statistics Canada’s advance estimate of receipts, released on Thursday, revealed that retail sales remained relatively unchanged last month.

In October, sales had risen by 0.7% to a seasonally adjusted 66.95 billion Canadian dollars (approximately $50.08 billion), marking the largest increase since April. This figure slightly missed economists’ expectations of a 0.8% advance. September sales, initially reported as a 0.6% increase, were revised downward to show a 0.5% rise.

However, in terms of volume, there was even more positive news, as sales for October increased by 1.2% compared to September. This signifies the largest volume increase seen this year and suggests that the headline rise in sales was hampered by falling prices.

When compared to the previous year, October’s retail sales showed a 2.2% increase. However, CIBC Capital Markets senior economist Andrew Grantham believes that this pick-up in spending is likely to be temporary.

While Statistics Canada did not provide specific details, it indicated that two months of higher retail trade had leveled off in November. The estimate, based on responses from nearly 55% of surveyed companies, will be subject to revision.

Economist Shelly Kaushik from the Bank of Montreal noted that as goods prices rose last month, there could potentially be a decline in retail sales volumes at the start of the holiday shopping season.

In addition to the retail sales data, employment figures for Canada in October showed a decrease in payroll employment, offsetting the previous month’s increase after minimal movement in July and August. Economic growth in Canada has been slower than population growth in recent months, leading to a slight increase in the jobless rate.

With Canada’s economy shrinking on an annualized basis in the third quarter of the year, economists predict little to no growth in the final three months of 2023. Manufacturing sales also experienced a decline in October, dropping by 2.8%, primarily driven by lower shipments of petroleum and coal products. Furthermore, wholesale sales weakened by 0.5% from the previous month, largely due to a decrease in machinery, equipment, and supplies.

Sharply Higher Interest Rates Drive Excess Demand Out of Weak Canadian Economy

Introduction

In recent speeches, Bank of Canada Gov. Tiff Macklem expressed that the significant increase in interest rates has effectively reduced excess demand within an economy that is expected to remain weak in the coming months. Macklem further projected that 2024 will serve as a transitional year for the economy, with restrained spending and curtailed growth following rapid-fire interest rate hikes aimed at controlling inflation.

Auto Dealers Drive October Retail Sales Increase

Despite a sharp decline in receipts at gasoline stations and fuel vendors due to lower prices offsetting higher volumes, October retail sales saw a boost, primarily driven by strong performance in the auto dealer sector. Sales increased across seven of the nine subsectors monitored by the agency.

Core Retail Sales Experience Growth

Excluding gasoline stations and motor-vehicle and parts dealers, core retail sales recorded a noticeable growth of 1.2% from September. This increase can be attributed to strong sales from general merchandise retailers.

Volume-Adjusted Sales Show Strong Performance

When accounting for price adjustments, October’s volume-adjusted sales witnessed a remarkable 1.4% climb, surpassing the 0.2% rise observed in the previous month.

Spending Patterns in October

The data for October highlights an uptick in spending on new vehicles, albeit a slight decrease in expenditure at used-car dealerships. Similarly, consumers spent more on automotive parts and accessories compared to the previous month. Other sectors that experienced increased spending include health and personal care retailers, as well as supermarkets and other grocery stores. However, building material and garden equipment retailers saw reduced spending.

Consumer Consumption Continues to Face Challenges

Stephen Brown, deputy chief North America economist at Capital Economics, remains cautious about the overall impact of October’s sales on consumer consumption. With surveys indicating weakness in consumer confidence and the lingering effects of high interest rates, Brown believes there is a risk of business inventories being drawn down, potentially offsetting any acceleration in consumption growth. As a result, the final quarter of the year may witness weak economic growth, albeit marginally positive.

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