Canadian retail sales rises for the third consecutive month in July

Canadian retail sales rose 0.5 % m/m in July, following a downwardly revised increase of 0.4% last month. This was slightly below the median consensus forecast calling for a 0.7% increase. July's advance was largely due to higher prices, as sales in real terms were up a more modest 0.2%.

Sales activity rose in 6 of the 11 subsectors - representing 55% of retail trade. The strength in today's report was concentrated at motor vehicle and parts dealers (2.0%) which recorded a sixth consecutive monthly increase. The gains that have been recorded since February have been largely driven by higher sales of new trucks.

Higher sales were also recorded at clothing and accessories (2.5%) - the first rise in three months - sporting goods (1.5%), health (0.4%) and general merchandise (0.3%) stores.

A slight rise in gas prices (+0.7% m/m for regular gasoline) was not enough to lift sales at gasoline stations (-0.2%) in July, bucking the five-month trend of consecutive increases in this subcategory. Sales activity also took a breather at electronics and appliance stores (-1.7%) after a jump of 8% in June that was fueled by new rules limiting the duration of cellphone contracts. Weakness was also recorded at furniture (-0.8%), building material (-0.7%) and food (-0.5%) retailers.

On a regional basis, sales were up in 6 provinces, with Manitoba (1.8%) and Ontario (0.8%) leading the way in monthly increases. After some recent gains, sales activity took a step back in British Columbia (-0.4%), Prince Edward Island (-0.6%) and New Brunswick (-0.1%). Meanwhile, retail sales declined in Saskatchewan (-0.3%) for the third consecutive month.

Low interest rates and low gas prices have supported sales activity throughout the year, but the retroactive lump-sum payments from the enhanced universal child-care benefits (UCCB) were an added cherry on top, helping support the retail sector in July. Since the payments began taking place towards the end of the month (July 20th) the effect is likely to carry forward in the near-term, providing a nice bump of nearly a full percentage point to overall consumer spending in Q3. Incorporating this morning's release leaves GDP growth at around 2-2.5% (annualized) for Q3, which is above the Bank of Canada's forecast of 1.5%. Put together, today's report is relatively positive and provides further credence to the view that the worst is likely behind us.

Over the medium term, consumer spending will be supported by modest employment and income gains, but will be constrained by rising debt burdens and an eventual slowdown in housing activity pending higher rates. This suggests that consumer spending is likely to advance at a pace of around 2% (annualized), roughly in line with overall economic growth.

"The expected rise in Q3 is likely to be an exception over a fairly stable outlook. While this appears to be the most likely path ahead, we cannot disregard a number of significant, mostly external, risks. For more on this, see our Quarterly Economic Forecast released earlier this week", says TD Economics.