August 20, 2008 / 1:20 PM / in 9 years

Retail sales signal slowdown, not recession

OTTAWA (Reuters) - The value of Canadian retail sales climbed 0.5 percent in June due to soaring gasoline prices, but in volume terms sales fell, indicating consumer spending is slowing but not enough to drag the economy into recession.

Statistics Canada said on Wednesday that retail sales fell 0.4 percent on the month when the effect of rising prices were stripped out. Excluding auto sales, they jumped by a bigger-than-expected 1.4 percent.

Markets had expected overall sales to climb 0.4 percent and to rise 0.5 percent without autos.

Despite signs of a softening in consumer spending, which has been keeping the economy buoyant amid a slowdown in exports, economists still expect gross domestic product to have grown in June and in the second quarter.

“Weaker real sales detracted from our estimates for GDP growth in June ... Depressed confidence, sagging job markets and cooling wealth gains are taking their toll on the Canadian consumer,” said Scotia Capital economist Derek Holt in a note.

Still, Scotia forecasts the economy to have grown by about 0.3 percent in June, and that growth in the April-June quarter will come in at between 0.9 percent and 1 percent on a quarter-over-quarter basis.

A separate Statscan report on Wednesday suggested continued weakness in the third quarter as the composite leading indicator was unchanged in July for the second straight month. The housing index registered its sharpest fall since June 2002, offsetting gains in most of the leading indicator’s other components.

The Canadian dollar fell against the U.S. dollar after the data was released, trading at C$1.0635 to the greenback, or 94.03 U.S. cents, at midmorning, down from C$1.0610 to the U.S. dollar, or 94.25 U.S. cents, at Tuesday’s close.

Fears of a recession -- defined as two consecutive quarters of economic contraction -- surfaced after gross domestic product shrank 0.1 percent in May. The downturn followed a rebound in April from a surprise first-quarter contraction.

With the economy growing, the Bank of Canada is expected to keep interest rates on hold at 3 percent in September.

“The question is how much will consumption slide going forward. Ultimately, we do not think the slowing in the Canadian economy is out of line with what the bank has expected and therefore the bank is likely to keep a neutral bias,” said Charmaine Buskas, senior economics strategist at TD Securities.

Gasoline station receipts climbed 4.2 percent in June due to price hikes but sales of new and used vehicles were down, resulting in a 0.1 percent decline for the automotive sector as a whole.

Food inflation also took its toll on consumers in June as food and beverage stores rang in 1.3 percent more sales than in May. Clothing and accessory store sales jumped 2.5 percent.

The leading indicator in July showed consumer spending continued to expand, although the housing index tumbled 2.9 percent due to fewer housing starts.

The only other indicator to decline was the average work week in the manufacturing sector, which fell 0.5 percent.

Editing by Peter Galloway

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