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OTTAWA (Reuters) - Canadian retail sales dropped unexpectedly in June, confirming a weaker trend in consumer spending that will likely trim overall growth in the second quarter and which raises questions about the Bank of Canada's hawkish slant on monetary policy.
Retail sales dropped 0.4 percent in June from May on broad-based weakness across sectors and across the country, and May numbers were also revised lower, Statistics Canada data showed on Wednesday.
The figures, which bucked expectations for a 0.1 percent increase in sales, are the latest to suggest that consumer spending - one of the main supports for the Canadian economy since the 2008 crisis - is slowing down.
"The surprise drop in June sales was broad-based, suggesting households are becoming a little more cautious, though cross-border shopping may have played a role as well," BMO Capital Markets senior economist Benjamin Reitzes wrote in a note to clients.
"The constant haranguing by policymakers urging households to borrow more cautiously, along with slowing job growth, has prompted some restraint."
Declining sales were reported in seven of the 11 subsectors, representing 64 percent of retail sales. Sales volume dropped by 0.1 percent.
General merchandise store receipts were down 1.5 percent, in part due to store closures. Gas station sales fell by 1.3 percent on lower prices, while sales at motor vehicles and parts dealers dropped by 0.4 percent.
Stripping out sales by motor vehicles and parts dealers, retail sales fell by 0.4 percent. Overall retail sales were 1.7 percent higher than in June 2011.
The weakness in retail sales had several economists doubting second-quarter growth forecasts from the Bank of Canada, which had pegged the economy to grow at a 1.8 percent annualized rate in April-to-June period.
"A significant drag from net exports will curtail real GDP growth to around 1.5 percent. This is short of the Bank of Canada's 1.8 percent forecast presented in the July Monetary Policy Report and we look to Governor (Mark) Carney's speech later this morning for an acknowledgement of the recent string of disappointing data," David Tulk, chief Canada macro strategist at TD Securities, wrote in a research note.
The Bank of Canada has maintained a slightly hawkish tone in recent months, suggesting the next move in interest rates will be higher, but market bets on the timing of the next rate hike have been moved further and further into the future as the economy loses momentum.
"Fortunately we don't expect the employment situation to deteriorate significantly which should help support modest growth in spending going forward, but modest enough to justify the Bank of Canada waiting to raise rates for awhile yet as it assesses how global uncertainties play out," TD Economics economist Leslie Preston wrote in a note.
Canadian GDP data for the second quarter is due out next Friday, and Scotia Capital economists Derek Holt and Dov Zigler said there is now a risk that the data will show the softest quarter for overall growth since the mild decline in the second quarter of 2012.
Additional reporting by Andrea Hopkins in Toronto; editing by Dave Zimmerman and Matthew Lewis