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Consumers appear to be ramping down their spending, according to the latest retail sales data, leading some economists to think the slowdown could act as a stay on more interest rate hikes from the Bank of Canada.
Slowdown could stay central bank’s hand
Consumers appear to be ramping down their spending, according to the latest retail sales data, leading some economists to think the slowdown could act as a stay on more interest rate hikes from the Bank of Canada.
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Statistics Canada reported on July 21 that retail sales for May rose 0.2 per cent month over month, missing analysts estimates for an increase of 0.5 per cent. The national data agency also said it expected June retail sales to come in flat, a further indication of possible spending fatigue among consumers burdened by higher borrowing costs from rate increases.
When the Bank of Canada hiked interest rates to five per cent at its policy announcement on July 12, it cited overactive consumers as one of the reasons behind its decision.
“While the bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy,” the central bank said in its statement explaining the last increase.
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For economists, the signs of waning “excess demand” — weak data in May and June and a downgrade for April — are unmistakable.
“There are clear signs that consumer spending is stalling,” Charles St-Arnaud, chief economist at Alberta Central, said in a note from July 21. “The moderation in consumption is even more evident when adjusting for inflation and population growth.”
Here’s what economists are saying about the latest retail sales numbers and what they mean for the Bank of Canada and interest rates.
“The latest preliminary estimate implies that retail sales values were unchanged in June which, given gasoline prices rebounded last month, implies that retail sales volumes fell again. While the continued disruption from wildfire smoke in June may explain some of that weakness, it still leaves retail sales looking weaker than the bank seems to have expected when it noted in its policy statement earlier this month that ‘recent retail trade … suggest more persistent excess demand in the economy.’ With the other data this week showing that headline CPI inflation also fell by more than expected in June, we would be surprised if the bank continued to raise interest rates at its next meeting in September.”
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“The BoC was shaken by consumer strength in the first quarter, even considering population growth, which led the central bank to raise interest rates again. This renewed vigour appears to have been short-lived, if real per-capita retail sales are anything to go by, posting their worst performance in eight quarters and clearly on a downward trend since 2021. Moreover, the excess savings available for consumption may not be as high as some people think.”
“May brought a sizable deceleration in retail spending growth. The only sector that points to a decisive gain is auto sales, where both nominal and unit sales were up. The rest of the categories are a mixed bag that points to consumers prioritizing spending on groceries at an expense of discretionary purchases. In real terms, second quarter real consumer spending is now tracking just slightly below one per cent quarter on quarter (annualized).
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“The ‘greater persistence of excess demand’ remains a challenge for the Bank of Canada. The bank expects that household consumption will slow over the course of next year as additional hikes work their way through the economy. With today’s reading, there is evidence that this slowdown is materializing. Still, consumers have financial resources in the form of excess savings, so the path to moderation may not be a smooth one. For now, we expect that monetary policy will remain restrictive until after the first quarter of 2024.”
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“Today’s data point to sluggishness in Canadian consumer spending even before the Bank of Canada restarted its rate hiking cycle.
“While overall GDP in Q2 is still tracking close to the 1.5 per cent Bank of Canada MPR (Monetary Policy Report) forecast, today’s data suggest that consumer spending likely wasn’t a significant driver of that growth, even accounting for growth in services spending. Industry data showing strength in areas such as manufacturing and wholesale suggest that inventory accumulation or business investment may be more significant contributors, which wouldn’t be bad news from an inflation point of view.”
“The outlook for retail sales and consumer spending more broadly remains tilted to the downside. Consumers’ finances continue to be squeezed by an erosion in purchasing power due to high inflation and rising interest rates. The resilience in the labour market, with continued robust job growth, is likely a significant support to household spending. An underperformance in job growth, especially job losses, could lead to significant underperformance in consumer spending.”
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“Retail sales momentum is clearly slowing. Purchases came in below consensus estimates, and we’ve now seen weak growth or outright declines in three of the past four months, with signs of more softness in June. Another 25-basis-point interest rate hike earlier this month from the Bank of Canada should weigh on the consumer in July and beyond.
“May data and downward revisions to April figures incrementally lowered our Q2 2023 real GDP growth tracking, but we’re still in the 1.5 to two per cent (quarter-over-quarter annualized) range. That is slightly higher than the Bank of Canada’s July forecast but is not enough to change our view that the Bank will hold rates steady in September.”
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TORONTO – Roots Corp. may have built its brand on all things comfy and cosy, but its CEO says activewear is now “really becoming a core part” of the brand.
The category, which at Roots spans leggings, tracksuits, sports bras and bike shorts, has seen such sustained double-digit growth that Meghan Roach plans to make it a key part of the business’ future.
“It’s an area … you will see us continue to expand upon,” she told analysts on a Friday call.
The Toronto-based retailer’s push into activewear has taken shape over many years and included several turns as the official designer and supplier of Team Canada’s Olympic uniform.
But consumers have had plenty of choice when it comes to workout gear and other apparel suited to their sporting needs. On top of the slew of athletic brands like Nike and Adidas, shoppers have also gravitated toward Lululemon Athletica Inc., Alo and Vuori, ramping up competition in the activewear category.
Roach feels Roots’ toehold in the category stems from the fit, feel and following its merchandise has cultivated.
“Our product really resonates with (shoppers) because you can wear it through multiple different use cases and occasions,” she said.
“We’ve been seeing customers come back again and again for some of these core products in our activewear collection.”
Her remarks came the same day as Roots revealed it lost $5.2 million in its latest quarter compared with a loss of $5.3 million in the same quarter last year.
The company said the second-quarter loss amounted to 13 cents per diluted share for the quarter ended Aug. 3, the same as a year earlier.
In presenting the results, Roach reminded analysts that the first half of the year is usually “seasonally small,” representing just 30 per cent of the company’s annual sales.
Sales for the second quarter totalled $47.7 million, down from $49.4 million in the same quarter last year.
The move lower came as direct-to-consumer sales amounted to $36.4 million, down from $37.1 million a year earlier, as comparable sales edged down 0.2 per cent.
The numbers reflect the fact that Roots continued to grapple with inventory challenges in the company’s Cooper fleece line that first cropped up in its previous quarter.
Roots recently began to use artificial intelligence to assist with daily inventory replenishments and said more tools helping with allocation will go live in the next quarter.
Beyond that time period, the company intends to keep exploring AI and renovate more of its stores.
It will also re-evaluate its design ranks.
Roots announced Friday that chief product officer Karuna Scheinfeld has stepped down.
Rather than fill the role, the company plans to hire senior level design talent with international experience in the outdoor and activewear sectors who will take on tasks previously done by the chief product officer.
This report by The Canadian Press was first published Sept. 13, 2024.
Companies in this story: (TSX:ROOT)
The Canadian Press. All rights reserved.
VANCOUVER – Mediated talks between the union representing HandyDART workers in Metro Vancouver and its employer, Transdev, are set to resume today as a strike that has stopped most services drags into a second week.
No timeline has been set for the length of the negotiations, but Joe McCann, president of the Amalgamated Transit Union Local 1724, says they are willing to stay there as long as it takes, even if talks drag on all night.
About 600 employees of the door-to-door transit service for people unable to navigate the conventional transit system have been on strike since last Tuesday, pausing service for all but essential medical trips.
Hundreds of drivers rallied outside TransLink’s head office earlier this week, calling for the transportation provider to intervene in the dispute with Transdev, which was contracted to oversee HandyDART service.
Transdev said earlier this week that it will provide a reply to the union’s latest proposal on Thursday.
A statement from the company said it “strongly believes” that their employees deserve fair wages, and that a fair contract “must balance the needs of their employees, clients and taxpayers.”
This report by The Canadian Press was first published Sept. 12, 2024.
The Canadian Press. All rights reserved.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Companies in this story: (TSX:TRZ)
The Canadian Press. All rights reserved.
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