‘It remains tough going:’ Bank of Canada will have to keep cutting to perk up weary consumers, economists say

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New retail sales data out on Friday showed Canadians are holding the line on spending as they struggle with the double whammy of higher interest rates and inflation.

Retail sales for May contracted 0.8 per cent, falling more than the 0.6 per cent drop estimated by economists, Statistics Canada said, with a flash estimate from the data agency calling for a 0.3 per cent pullback in June.

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Here’s what economists have to say about the data and what it means for the economy and the Bank of Canada, which makes its next interest rate announcement on July 24.

‘Subdued’ consumer: Alberta Central

“Consumers remain cautious with their spending,” Charles St-Arnaud, chief economist at credit union Albert Central, said in a note estimating that population growth was the only thing the kept retail sales from declining further.

Canada’s population has grown by record amounts over the last few years, providing support for the economy.

However, after adjusting for population growth and inflation, St-Arnaud said retail sales were “lower” by 2.3 per cent year over year in April. Core sales, which exclude gasoline and automobile and parts sales, likely contracted 4.6 per cent during the same time period.

St-Arnaud doesn’t think the outlook will change anytime soon despite a second widely expected cut to interest rates by the Bank of Canada. The central bank trimmed rates to 4.75 per cent from five per cent in early June. Markets are betting officials will cut by another 25 basis points on Wednesday.

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“While the recent and upcoming rate cuts are expected to provide some relief, we believe consumer spending will remain subdued,” he said.

‘Picture even gloomier’: National Bank of Canada

There was plenty to be disappointed about in the retail sales numbers, National Bank of Canada economists Alexandra Ducharme and Jocelyn Paquet said, in a note.

First, the data came in well below estimates. Excluding automotive and parts sales, the drop was 1.3 per cent, they said, representing “its largest decline since July 2022.”

Also, May’s decline was widespread across most of Canada’s sectors.

Taking the flash estimate for June into account, Ducharme and Paquet said they reckon that retail sales pulled back 0.7 per cent annualized in the second quarter.

“The picture is even gloomier when accounting for strong population growth, as we estimate that real retail sales contracted 3.9 per cent annualized on a per-capita basis,” they said, adding that decline “demonstrates the negative impacts of restrictive monetary policy on the consumer.”

The pair don’t see sales perking up in the coming quarters despite more rate cuts, which they argued still leave monetary policy at “a restrictive level, meaning that the mortgage renewal payment shock continues.”

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They expect consumers to remain on guard, especially as the labour market starts to show cracks.

Another reason to cut: CIBC World Markets

The poor May sales and sour outlook for June are giving the Bank of Canada another reason to cut interest rates, said Andrew Grantham, an economist with CIBC World Markets.

“It remains tough going for Canadian consumers and by extension retailers, with further interest rate cuts needed to provide meaningful relief,” Grantham said in a note.

Annually, sales volumes rose 0.7 per cent, he said, “which would represent a sizable decline in per-capita terms given that population growth is north of three per cent year over year.”

He also noted that the June flash estimate could have been affected by software issues that struck car dealerships in Canada and the United States.

“While consumer spending was still likely a positive contributor to Q2 GDP, it appears that growth will come from services and overall will be much more modest than in the previous two quarters,” Grantham said.

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