Retail sales came in weaker than expected in September, down 1.7%, pushing economists to call for a 50 basis point cut to Canadian interest rates.

This was the biggest monthly decline since the ice storm in early 1998, when sales slipped 2.2%. The slide was broadly based with declines in autos, clothing, furniture, and general merchandise.

BMO Nesbitt Burns reports that the damage would have been even deeper if not for a temporary spike in gasoline prices in early September, and it notes that the headline result for August was revised down to a flat reading from the initial estimate of up 0.3%.

“Many Canadians were in no mood to shop after witnessing the terrorist attacks on their American cousins, leaving a number of retailers staring at near-empty stores in the days immediately following September 11,” says CIBC World Markets. “And while much of the lost ground looks to have been recovered in October, the underlying economic weakness of the North American economy should leave consumers in a cautious frame of mind for months to come.”

Adjusted for inflation, real retail sales dropped 2.3% in September. “This suggests that overall consumer spending just barely crawled forward in Q3, and increases the odds that next Friday’s GDP report for the quarter will post a decline. We look for Q3 GDP to fall at nearly a 1% annual rate, which would represent the first quarterly decline in GDP since Q1 1992,” says BMO.

CIBC agrees, noting, “The sharp drop in September real retail trade left an ugly mark on the third quarter.” But it is sticking with its call for a 0.7% decline in third quarter output. “Having already seen the damage to US retailing during September, the markets were braced for an ugly headline. Still, the larger-than-expected retreat will come as little comfort to the Bank of Canada, which remains poised to deliver a 50 bps cut on Tuesday, November 27.”

“No ambiguity here — sales were every bit as weak as expected,” says BMO. “This raises the chances that Q3 GDP will post a small decline and that the Bank will cut rates 50 bps next week.”