Retail sales dialed back in June after May surge; quarterly figures high

OTTAWA (CP) - Retail sales were the highest in almost six years during the second quarter, despite a shopping break taken by consumers in June, lending support to solid growth in the Canadian economy this year, economists say. Total retail sales fell 0.9 per cent to an estimated $34.6 billion in June after advancing 2.6 per cent in May. Buoyed by May's advance, quarterly sales growth for the April-to-June period reached three per cent, the largest three-month gain in almost six years.

The June drop "is by no means symptomatic of weakness in overall Canadian retail trade," TD Bank economist Pascal Gauthier said in a note to clients, noting that the bulk of the decline came on the heels of the largest monthly increase in a decade and was due to a 2.7 per cent drop in sales in the automotive sector.

"Looking ahead, we expect continued strength in retail trade," Gauthier said.

"On the upside, a significant number of consumers in Quebec have benefited from a windfall under the pay-equity settlement which should continue to support consumer spending in that province. Furthermore, the overall backdrop for the nation remains positive with decent job creation and rising wages."

While central banks ponder halting or even lowering key interest rates in the wake of a crisis in global credit markets, the solid fundamentals of growth in consumer spending will likely keep economic growth around the three per cent mark for the year, said BMO Capital Markets economist Michael Gregory.

"While it now seems likely that the dislocations in local and global credit and money markets will keep the Bank of Canada on the sidelines next month (this morning's benign CPI report also probably makes the bank feel more comfortable about pausing), we still judge that if not for these liquidity issues, the upside inflation risks posed by household spending argue for a further rate hike," Gregory said.

Excluding automotive - which includes gasoline station sales - retail sales were essentially unchanged.

General merchandise stores (down 0.7 per cent), clothing and accessories stores (down 0.4), and building and outdoor home supplies stores (down 0.3) fell moderately in June.

Furniture, home furnishings and electronics stores sales fell for the second straight month after six months of consecutive growth.

Partially offsetting these declines were sales increases at food and beverage stores (up 0.7 per cent), at miscellaneous retailers (0.4) and in pharmacies and personal care stores (0.1).

Retail sales at constant prices fell 0.6 per cent in June, yet high sales levels throughout the second quarter resulted in a strong 2.6 per cent increase during this three-month period.

On Tuesday, Statistics Canada said the annual inflation rate was 2.2 per cent in July, the same as in June, amid higher housing costs.

The annual rate has been at 2.2 per cent since April.

The core inflation rate - which strips out volatile items such as fuel and food and doesn't count changes to indirect taxes - was at 2.3 per cent after posting a 2.5 per cent increase in June.

The Bank of Canada likes to see the core rate - which it studies when setting interest rates - at just two per cent.

© The Canadian Press, 2007