May 22, 2013 / 3:03 PM / in 4 years

UPDATE 2-Canada retail sales flat but higher volumes spur optimism

* Market operators had expected a 0.1 percent rise

* Sales rose by 0.7 percent in volume terms

By David Ljunggren

OTTAWA, May 22 (Reuters) - Falling gasoline prices kept the value of Canadian retail sales unchanged in March from February, but analysts said a sharp rise in volumes signals the economy was more robust than expected in the first quarter.

Canada's economy has spluttered in recently, hit by uncertainty in foreign markets and the strong Canadian dollar, and at first sight the March retail figures seem to confirm the trend.

But Statistics Canada said on Wednesday that after removing the effects of price changes, particularly less expensive gasoline, retail sales in volume terms rose by 0.7 percent. The volume measure is used for calculating gross domestic product (GDP).

Mazen Issa, a Canada macro strategist at TD Securities, said the growth in volumes was surprisingly strong.

"The economy looks to have gotten off to a brisk start to the year with first quarter GDP tracking well above its trend rate - we estimate between 2.2 percent and 2.5 percent," he said in a note to clients.

The Bank of Canada last month forecast that first quarter annualized growth would be just 1.6 percent. Statscan will release the first quarter GDP data on May 31.

Analysts had expected retail sales to grow 0.1 percent from February. Statscan trimmed February's month-on-month growth to 0.7 percent from an initial 0.8 percent.

"Overall, despite the slightly weaker headline, the healthy detail on volumes should limit the market reaction this morning," Emanuella Enenajor of CIBC World Market Economics said in a note to clients.

Doug Porter, chief economist at BMO Capital Markets, said the solid rise in volumes pointed to first quarter annualized growth of 2.3 percent.

The Canadian dollar initially dropped to a 10-week low of C$1.0332 to the U.S. dollar, or 96.79 U.S. cents, before making up some of its losses. It closed Tuesday's North American session at C$1.0268, or 97.39 U.S. cents.

Higher sales were reported in six of 11 subsectors tracked by Statistics Canada, representing 47 percent of total retail sales.

Gasoline station sales decreased by 1.3 percent, which mainly reflected lower prices at the pump.

The largest increase in sales was a 3.1 percent rise at clothing and clothing accessories stores.

Sales at motor vehicle and parts dealers rose by 0.7 percent, a third consecutive monthly gain. Sales in food and beverage stores, the largest of the 11 subsectors, fell by 0.1 percent from February.

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