OTTAWA (Reuters) - Canadian retail sales rose by a weaker-than-expected 0.3 percent in May, but a healthy jump in sales volume and heavy shopping for food, beverages and clothing ignited hopes that consumers would help keep the economy out of the doldrums.
The robust sales in supermarkets, general merchandise and clothing stores offset a drop in auto and gasoline sales, Statistics Canada data on Tuesday showed. Six of 11 subsectors tracked by the agency reported gains, representing 53 percent of total retail trade.
Even though May sales fell short of the 0.5 percent growth forecast by market players and were not strong enough to make up for a 0.6 percent decline in April, sales that excluded motor vehicle and parts jumped 0.5 percent against expectations of no change.
Likewise, sales volume -- more important in calculating gross domestic product figures -- rose 0.7 percent.
Consumer spending was a crucial factor in Canada's quick recovery from the 2008-09 recession but it has weakened in recent months. The May data suggests it is not quite as weak as some had predicted.
"Overall, a quite healthy report, perhaps enough to nudge our estimate for May GDP up a tick to 0.3 percent, although we will later get payrolls data to add color to that reading," said Avery Shenfeld, chief economist at CIBC World Markets.
The Canadian dollar rose immediately after the data but was quickly knocked back down by bearish news from Europe. At around 10:00 a.m. EDT (1400 GMT) it was at C$1.0170 versus its U.S. counterpart, or 98.33 U.S. cents, down slightly from Monday's close of C$1.0168 to the greenback, or 98.35 U.S. cents.
Retail sales in dollar terms have see-sawed for the past six months and at $38.9 billion ($38.1 billion) in May, were unchanged from November 2011.
"This pullback in the pace of spending most likely is a reflection of Canadian consumers exercising caution given the elevated levels of household debt and volatility in financial markets due to the ongoing European crisis," said Dawn Desjardins, assistant chief economist at RBC, in a note to clients.
David Tulk of TD Securities said the modest rebound in consumer spending pointed to annualized second-quarter economic growth of about 2 percent, above the Bank of Canada's 1.8 percent estimate but not strong enough to push the bank to raise interest rates to slow growth.
The central bank has broken ranks with its global peers in signaling that it may need to raise interest rates from their current 1.0 percent if the economy continues to absorb excess slack, which would require growth of above 2 percent.
At the same time, the bank this month cut its near-term economic growth forecasts and said consumer spending would be weaker than it had previously anticipated, although it would continue to be a key driver of growth.
In contrast to retail sales, manufacturers' sales fell a surprise 0.4 percent in May, Statscan said last week.
But a survey of manufacturers by KPMG, released on Tuesday, showed 85 percent were optimistic about the future of their businesses, up 9 percentage points from a year earlier.
Editing by James Dalgleish; and Peter Galloway