The Canadian consumer has been one of the unsung heroes of the economy, but the latest retail sales data shows consumption fatigue at a time when the Canadian businesses need them to open up their wallets.
Retail sales growth slowed to just 1.6 per cent in 2019 — the slowest pace since 2009, according to data from Statistics Canada. Of particular concern was that December sales were flat — a time when shops see their biggest traffic in the year.
“The holiday period didn’t really accelerate things,” said Ed Strapagiel, a Scarborough, Ont., retail and marketing consultant. He says that declines in brick-and-mortar shopping, automotive and gasoline sales dragged down the sector in particular.
As commodity prices falter and manufacturing sees uncertainty, the Canadian consumer has stepped up to the plate, driving up, among other things, retail sales over the past few years.
Canadians racked up outstanding credit card balances of more than $100 billion in the third quarter of 2019 for the first time, according to TransUnion Co. And the average Canadian’s non-mortgage debt may rise by another 1 per cent to $31,531 by the end of 2020, according to a forecast by the credit-tracking agency.
But broader economic factors are sapping consumer sentiment.
“The lagged impact of earlier interest rate hikes cutting into household spending power likely is part of the explanation, and also helps to explain why household insolvency rates edged higher last year,” said RBC Capital Market economist Nathan Janzen in a research note last week.
One potential bright spot in the retail data are e-commerce sales, which grew by 31.1 per cent in the month of December from the same time last year, to 4.6 per cent of all retail sales, a record high online market share. Given the difficulty of tracking online sales, that number could be even higher.
“What’s not captured in the Canadian data is what Canadians are spending on foreign websites. Statistics Canada does its surveys on strictly Canadian businesses,” Strapagiel said, which leaves out some online spending at foreign retailers.
Strapagiel says that the retail slowdown is a cyclical issue as the economy worsens, and that inflation and population growth should continue to push up sales over the long-term.
“All things considered, retail should be doing about 3.5 per cent per annum,” he said, describing the long-term trend, “and we’re quite well below that now.”
Statistics Canada is expected to release fourth quarter GDP numbers on Friday, which could help the Bank of Canada decide on interest rates next Wednesday.
RBC Capital Markets thinks transitory factors cut about 0.5 percentage points from annualized growth in the final quarter of 2019, slightly more than in the previous quarter.
“With underlying growth also appearing to have slowed, our Q4/19 forecast has been lowered to 0.3 per cent,” RBC said, noting that the first quarter of 2019 may see a below-trend 1.4 per cent GDP gain.
“A permanent hit to auto production following the closure of the GM Oshawa plant will subtract a couple of tenths from growth in the quarter. The coronavirus outbreak will also represent an economic headwind in early-2020.”
The retail slowdown, combined with disruptions from the coronavirus, or COVID-19, and the shutdown of rail networks, has some analysts warning the risk of recession in the Canadian economy is high.
“Auto, rail, and teacher strikes, manufacturing and retail sector layoffs, the COVID-19 outbreak and now rail blockades are all hitting an already vulnerable Canadian economy,” said Tony Stillo, an analyst at Oxford Economics. “We think Canada’s 12-month recession odds remain worrisome at 40 per cent.”
Financial Post
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