Canadian retail sales were well below expectations in May, dropping 1.3% in the month, and dimming some of the light that has been emanating from the halo over the Canadian economy in recent months.

“April’s flowers turned into May’s showers for Canadian retailers, with the sector’s sales drop representing yet another disappointment in what now looks like a very weak month for the economy,” says CIBC World Markets. Sales were down 1.3% in May, and 1.1% after allowing for price declines, taking the three-month change in real retail sales to a 5.2%
annualized decline. “That dose of bad news came after earlier reports showing reversals in both manufacturing shipments and exports in the same month.”

The pullback can be attributed to three primary factors including unusually cold weather in May crunched sales of many seasonal goods, a decline in gas prices undercut service station receipts and auto sales continued to gradually drift lower from the supercharged levels early in the year, says BMO Nesbitt Burns. “Even taking these factors into account, underlying retail activity clearly geared down in Q2, with sales down at a 1.7% annual rate in the past three months.”

CIBC suggests that the second quarter is still going to be good, but just not as good as might have been thought after April’s boom. “Manufacturing, wholesaling and now retailing have all reported declines in May, pointing to a roughly 0.2% drop in GDP for the month. That puts the Canadian economy on target for a 4.5% growth rate in Q2, down from the 5% pace anticipated only a week ago.”

“Even with a barrage of special factors, this is a disappointing result,” says BMO. “May has delivered a cold splash of reality for the Canadian economy after an incredible run earlier in 2002.” CIBC says that in light of the report, the July rate hike will be the last for the year.