Canada: Retail Sales Decline in March, But February’s Reading Revised Up

Retail sales fell by 1.4% month-on-month (m/m) in March in line with the Statistics Canada’s advanced estimate. However, February’s print was revised up to a flat reading from an originally reported loss of 0.2%.

Adjusting for the impact of inflation, the volume of retail sales was 1.0% lower on the month.

The decline in today’s headline reading was largely driven by decreases at motor vehicle and parts dealers (-4.4% m/m), where sales contracted for the first time in eight months, and gasoline stations and fuel vendors (-3.9% m/m).

Excluding these categories, core retail sales were 0.3% m/m higher in March.

The gain in core sales was led by higher sales at building material and garden equipment and supplies dealers (+1.6% m/m), miscellaneous retailers (+3.5%), electronics and appliance stores (+1.6% m/m) and general merchandise retailers (+0.6% m/m).

Meanwhile, clothing and clothing accessories stores (-1.2% m/m), sporting goods, hobby items, musical instruments and books stores (-1.6% m/m) and furniture and home furnishings stores (-1.4% m/m) were the biggest underperformers.

E-commerce sales, which are not included in the headline tally, slowed from a whopping 9.6% growth rate in February to a more modest 2.2% pace in March.

Statistics Canada’s advanced estimate for April indicates a 0.2% m/m gain – that’s in line with our internal card spending data (which excludes auto sales and tilts toward housing-related categories).

Key Implications

The most fitting epithet to today’s report is “lethargic” – even auto sales, which seemed immune to higher rates and prices over the past eight months, have taken a March break. Still, upward revisions to February make the print a little less dire. Solid growth in core sales suggest that consumers, while a bit more cautious, haven’t stopped spending. Meanwhile, our estimates of services activity (based on internal high-frequency card spend data) suggests that consumers still have a healthy appetite for spending on travel and going out. With that, we expect consumer spending growth to come in around 5 percent (annualized) in the first quarter of 2023.

Looking ahead, spending is poised to step down to a below trend growth as Canadians face stronger headwinds from rising costs of borrowing as the cumulative effect of higher policy rates works through the economy. According to the Bank of Canada’s Financial System Review, one-third of all mortgages have already seen an increase in mortgage costs while the rest will be affected over the next three years, as more mortgages are refinanced at higher rates. Over this time, the Bank expects the median payment to rise by 20%, absorbing a good portion of past income growth and reducing spending capacity. While some homeowners may mitigate increasing costs by extending amortization or tapping into an estimated $140 billion in excess personal deposits, many will see a notable reduction in their financial flexibility. This, in turn, may limit the BoC’s appetite for another rate hike.