Canadian Retail Sales Bounce Back after November's Slide

Canadian retail sales rebounded in December by rising 0.4%, which was broadly in line with the 0.5% rise expected going into the report. Excluding the volatile autos and part component, sales also rose 0.4% in the month relative to expectations of a 0.3% increase. On a volumes basis, retail sales were up by 0.6% although this followed a disappointing -1.3% (revised from -1.0%) drop in November.

The December rise reflected higher sales in five of eight spending categories. General merchandise stores had sales rise by 3.3%, and clothing and accessory stores posted a 2.1% monthly gain. Statscan said that warm weather in November contributed to the dip that clothing and footwear had in sales, but this was reversed in December. Sales in the overall auto sector rose 0.9% with gasoline service stations seeing a 2.2% increase. Sales at new car dealers fell 0.2% while used car dealers reported sales increased by 1.7%. Moderating the monthly overall gain were declines reported at food and beverage stores, pharmacies, and building and outside supply stores.

Sales rose in six provinces. Notable contributors to the overall gain were Alberta (1.8%), New Brunswick (2.0%) and Quebec (0.7%). In Ontario, sales slid by -0.2%.

Retail sales in volume terms have been volatile with December's gain followed by a 1.3% decline in November, but there were solid gains of 1.2% and 0.9% in September and October, respectively. The December increase adds to the run of strong numbers released earlier in the week, with real manufacturing sales rising 2.1% and real wholesale trade up 1.5%. The data point to December GDP rising 0.4%, stronger than November's 0.3% increase and October's 0.2% gain. These monthly gains are consistent with our call that GDP growth strengthened in the fourth-quarter 2009 to an annualized 4.0% pace following the disappointing 0.4% rise in the third-quarter 2009.

Reports on employment and housing starts in January showed solid gains pointing to the fourth quarter's stronger growth pace being maintained in early 2010. Additionally, the January leading indicator, out this morning, showed a hefty 0.9% rise in the month. The Bank of Canada anticipated that the pace of growth would accelerate in the final quarter of last year according to the January Monetary Policy Report, which forecasted real GDP rising at a 3.3% annualized rate. Even if the economy turns out a stronger increase that is in line with our monitoring, the Bank will likely wait for confirmation that this stronger growth trend is sustained before starting to tighten policy. Our forecast assumes that the central bank will adhere to its conditional commitment of leaving the overnight rate unchanged at 0.25% through to the end of the second-quarter 2010 although we expect this rate then to rise 100 basis points over the second half of this year.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.