Canadian retail sales were much stronger than expected in June. Statistics Canada reported Thursday that consumer spending in retail stores advanced 0.3% in June to $26.4 billion, after a 0.5% gain in May.

Economists had expected a 0.7% drop. This unanticipated strength weighs against a rate cut by the Bank of Canada in September.

The report surprised economists because auto sales didn’t fall as far as expected, dropping just 2.1% in the month. Excluding autos, retail sales were also frothier than expected, gaining 1.2%.

BMO Nesbitt Burns said that food store sales led the way, a fact it attributes to the SARS and mad cow scares. “Usually a beacon of boring stability, grocery store sales have bobbed and weaved this year, as consumers avoided restaurants amid the SARS scare and had temporarily avoided beef amid the mad-cow scare. This has triggered some big swings in this typically sedate sector,” it said.

June’s sales volumes were also strong. Real retail sales volumes rose 0.5%.

“Although real retail sales advances in May and June have helped repair an earlier SARS-related blow, they weren’t sufficient to prevent a material downshift in consumer activity for Q2 as a whole,” CIBC World Markets said. “Total real sales rose an annualized 2.1% in the second quarter, with that growth rate well less than half of that seen in the initial quarter of the year.”

CIBC said that today’s real retail gain, combined with real growth in wholesaling and a resilient housing market performance, will help make up for continued sluggish in June manufacturing. But the firm insisted that notwithstanding the strong report, “the Bank of Canada still has ample evidence of eroding growth and receding inflation to cut rates by a quarter point on September 3.”

“This decent result will have only a limited impact on the Bank’s rate decision in September,” agrees Nesbitt. Although, it allows, “But it does suggest the economy was on the mend heading into the third quarter after all the challenges of Q2.”