'Grim' retail sales underbelly points to Bank of Canada restarting rate cuts, economists say
Consumers loaded up on purchases in March to get ahead of tariffs imposed by the United States, but weakening discretionary and cyclical spending should convince the Bank of Canada to start cutting interest rates again, economists say.
Retail sales in March increased 0.7 per cent month over month, according to Statistics Canada's advanced estimate released on Friday, which is the first increase of the year and a significant jump from the 0.4 per cent contraction in February.
The results in February matched analysts estimates, but core sales, which exclude automobiles and gasoline, rose 0.5 per cent from January, outpacing estimates for a contraction of 0.2 per cent.
David Rosenberg, an economist and founder of Rosenberg Research & Associates Inc., said there was a 'grim message' embedded in the February data because 'cyclically sensitive spending tumbled 1.7 per cent, and that was after a 1.4 per cent decline the prior month.'
That includes a 2.8 per cent drop in building materials spending, a 2.9 per cent decrease in furniture/appliances, which he called 'a signpost of the weakening trend in the Canadian housing sector,' and a 2.7 per cent drop in clothing sales, following a 1.2 per cent decline in January, which he equated to a decline in job prospects.
He also said much of the gain in non-core items could be attributed to increases in food and pharmaceutical sales.
Shelly Kaushik, a senior economist and vice-president of economics at BMO Economics, said the estimate for March is perhaps the bigger story since it reflects the anticipated increase in auto sales ahead of U.S. tariffs and Canadian countermeasures.
But she said the bank expects significantly weaker numbers when the data excluding auto sales is released in May.
U.S. President Donald Trump talked about imposing automotive tariffs during March and they took effect on April 3, with Canadian retaliatory measures announced on April 9.
Given the ongoing flux of the tariff situation, February's results are 'a look in the rearview mirror,' Kaushik said in a note.
First-quarter retail sales 'flatlined,' Katherine Judge, an economist at CIBC Capital Markets, said in a note, which was a big drop from the 5.6 per cent annualized gain during the fourth quarter.
She said lower gasoline prices didn't lead Canadians to spend their money elsewhere.
Economists have forecasted a decent first-quarter gross domestic product (GDP) 'handoff' to the second quarter, but they don't think that strength will last.
Judge expects unemployment to rise due to 'sectoral' tariffs, as consumer and business sentiment continues to slump, providing the 'Bank of Canada with enough evidence of GDP weakness by the June meeting to cut by 25 basis points.'
David Rosenberg: Bank of Canada has made a big mistake by being so timid
Buy Canadian a top priority, Napoleon CEO says
Rosenberg thinks a few more rate cuts are coming.
'This squishy soft environment, coupled with the elevated level of economic uncertainty, should be giving the Bank of Canada the green light to get back on the rate-cutting path and not stop until it minimally gets the policy rate to the very low end of the neutral range (2.25 per cent).'
• Email: gmvsuhanic@postmedia.com
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