Canadian retail sales came out in line with analyst expectations, up 0.2% in
May, although this represents a significant slide.

Most of the slowdown can be attributed to a 1% fall in auto sales. Ex-auto sales were up 0.6%. These results come after a large 1.8% headline gain in April, revised from the initial increase of 1.6%. “Some of the recent gains in retail receipts reflect the impact of rising prices, and May was no exception,” notes BMO Nesbitt Burns. “Higher prices for gasoline, fruit, and cigarettes accounted for all of the monthly increase. The volume of sales actually fell 0.3% in the month. Still, this does not alter the underlying picture of a resilient consumer. Real spending has risen at a 3.3% annual rate in the past three months and is up a solid 3.6% in the past year.”

RBC DS Capital Markets Research observes “big-ticket items were scratched from shopping lists. Furniture and appliance sales dropped, [as did auto sales]. Both of these are indirect measures of consumer confidence, which may be showing signs of strain from the ongoing weakness in stock markets and softening labour markets.”

DS concludes that domestic demand is weakening. “Consumer spending will hit a softer tone on real GDP in Q2, with real sales in April and May a mere 0.5% over Q1 levels. Although low interest rates and rising incomes are still working in favour of the consumer, it is uncertain if confidence will be able to hold up against the renewed onslaught of negative media headlines highlighting a more extended U.S. slowdown, negative corporate earnings, and a softer domestic job market.”

BMO is sounding a more optimistic note saying “Canadian consumers are hanging tough. While slower job growth will dampen outlays in the second half, spending will also receive important support from provincial tax cuts (in B.C. and Quebec especially), lower borrowing costs, and still-high consumer confidence.”

CIBC World Markets is upgrading its GDP forecast in the wake of the report. It notes, “While real retail sales won’t offer any support, surprisingly robust manufacturing and wholesale reports (and the end of strikes in the non-business sector) leave May GDP poised for 0.3-0.4% gain. That points to Q2 growth in excess of our earlier 1.0% forecast, with 1.5% now more likely.”

Yet it still sees rate cuts in response. “That’s still not fast enough to prevent further slack from emerging in the Canadian economy, leaving the Bank with an open door to keep rates heading lower.”