OTTAWA (Reuters) - Consumer spending in Canada showed no sign of slowing in January as retail sales posted a third straight month of big gains thanks to a cut in the sales tax and an appetite for new passenger cars.
Statistics Canada reported a 1.5 percent jump in January retail sales on Tuesday, beating analysts' expectations of a 1.2 percent increase and following a revised 0.8 percent gain in December.
"Domestic demand remains strong in Canada, and there's no sign yet of any serious cracks --- certainly no sign in this report," said Doug Porter, deputy chief economist at BMO Capital Markets, in an email note to clients.
The news sparked a shortlived rally in the Canadian dollar, which rose to C$1.0140 to the U.S. dollar, or 98.62 U.S. cents, from C$1.0179, or 98.24 U.S. cents at Monday's close. The currency later gave back the gains as investors turned their focus to the sagging U.S. economy.
Automotive sector sales rose 1.8 percent in the month as buyers took advantage of discounts, a one-percentage-point reduction in the federal sales tax and better financing, Statscan said.
Passenger car sales skyrocketed in January, up 16.2 percent compared with December, according to a separate Statscan survey.
But even excluding the auto sector, which accounts for about a third of the total, retail sales grew 1.3 percent amid strength in all sectors.
Unusually heavy snowfalls in January likely caused the 3.2 percent surge in sales by building and outdoor home supplies stores as Canadians invested in shovels, snow blowers and home repair supplies, Statscan said.
Other sectors that posted growth of more than 1 percent in January were clothing and accessory stores, furniture, home furnishings and electronics stores and general merchandise stores.
Still, economists were skeptical the consumer spending spree would last into February, predicting sales would slow just as they did in the United States in that month.
In fact, a disappointing 1 percent gain in the volume of retail sales in January led JP Morgan Canada to cut its first-quarter growth forecast to 0.6 percent from 0.7 percent, said Chief Economist Ted Carmichael.
Preliminary Statscan data showed new car sales decreased in February. However, the labor market and housing starts remained robust -- boosting household incomes.
"While January's results are quite strong, February's retail sales report will not likely follow suit and weakness will likely ensue in the months ahead," said Karen Cordes, economist at Scotia Capital.
"As a result, this report does not change our call for a further 50-basis-point reduction in the Bank of Canada overnight rate on April 22," she said.
The central bank has said it will cut interest rates further after reducing its key overnight rate by one percentage point since December. A slim majority of primary securities dealers surveyed by Reuters expect a half-percentage-point cut in April.
Reporting by Louise Egan; Editing by Bernadette Baum