Canada: Retail Sales Surprise to the Upside in July September 20, 2024

Today's release is a pleasant surprise for the Canadian economy, after two downbeat quarters for retail sales. The gradual pickup in core sales is encouraging, and so is the August 0.5% flash.

Things are looking up for the third quarter, but some caution is in order. Five out of 7 months this year posted monthly declines in retail sales, and year-to-date growth is admittedly lacklustre (-0.8% nominal, +0.3% in volumes). It remains to be seen if strength in auto sales will continue, as their progress have been uneven month-to-month and the July rebound follows a widespread software outage at dealerships in June. In all, auto sales are 3.6% below their December 2023 level. Moreover, other interest-rate sensitive sectors also have continued posting soft sales.

Looking forward, we continue to expect relatively downbeat consumer spending in the next few months. Household finances are still squeezed, and employment growth remains weak. Consumer savings are rising, as many prepare for an increase in mortgage payments at renewal. And even if inflation is easing, prices remain elevated, at 19% above their end-of-2019 level. Although declining borrowing rates should help consumers, planned reductions in immigration will likely be offsetting for overall retail spending.

After today's release, we're tracking annualized real growth of around 1% for , well below the latest projections (2.8%). We expect the to continue its interest-rate cutting cycle, with a likely 50 basis-point cut at its October meeting (see our latest Economic and Financial OutlookExternal link. ).