October 22, 2008 / 6:07 PM / 9 years ago

Gloomy data adds weight to rate-cut prospect

4 Min Read

OTTAWA (Reuters) - Canadian retail sales dropped for the first time in six months in August and the composite leading indicator fell, giving weight to analysts' predictions that the Bank of Canada will cut interest rates again this year to try to stimulate an economy increasingly hit by the global financial crisis.

Statistics Canada said on Wednesday that retail sales slipped by 0.3 percent from July due to lower sales in the automotive sector. Market analysts had, on average, forecast a 0.2 percent fall in August.

"Canadian consumers clearly lost their resilience even before the peak credit crunch hit. This does not bode well for the traditional Christmas retail season that we're now entering," said Derek Holt and Karen Cordes of Scotia Capital.

"This provides further support to our view that the Bank of Canada needs to cut rates significantly further."

The central bank cut its key interest rate on Tuesday by a quarter point to 2.25 percent, and said it would likely have to ease credit further. The next scheduled rate announcement date is on December 9.

The souring economy is also set to dominate domestic politics. During the campaign leading up to last Tuesday's election, Prime Minister Stephen Harper ruled out running a deficit at any point in the next four years.

Since retaining power, however, Harper has declined to say whether he can keep the government's budget in surplus next year. Going into the red is widely seen as politically unwise in Canada, which spent several painful years eliminating big deficits in the 1990s.

The August drop in retail sales was the first since a 0.3 percent decline in February. The automotive sector dropped by 1.8 percent, largely due to a 3.7 percent drop in sales at gasoline stations.

"The outlook for consumer spending isn't promising. Canadian domestic demand is clearly slowing, reinforcing the bank's decision to cut rates ... and signaling more easing to come," said Benjamin Reitzes of BMO Capital Markets Economics.

To add to a general feeling of gloom, Canada's composite leading indicator dropped by 0.2 percent in September from August, pulled down by sharp declines in the stock market.

By noon (1600 GMT) the Toronto Stock Exchange was down around 270 points, or 2.7 percent.

The data did little to help the Canadian dollar, which tumbled to its lowest level versus the U.S. dollar in more than three years on lower oil prices and a stronger greenback.

At 12:10 p.m. (1610 GMT), the Canadian unit was at C$1.2502 to the U.S. dollar, or 79.99 U.S. cents, down from C$1.2137 to the U.S. dollar, or 82.39 U.S. cents, at Tuesday's close.

Paul Ferley of RBC Economics Research said he expected the economy to continue growing, albeit slowly.

"The risks to this outlook are clearly on the downside ... we expect that the Bank of Canada will continue to ease policy with another 25 basis point cut in the overnight rate expected before the end of the year," he said.

This Friday Statscan will release the latest inflation figures. It reported last month that 107,000 jobs had been created in September, 10 times the expected number.

"Only the labor force survey, which is grinding out jobs as if Canada is booming, stands in the way of a clear declaration of recession," said Krishen Rangasamy of CIBC World Markets.

($1=$1.25 Canadian)

Reporting by David Ljunggren; Editing by Peter Galloway

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