Canadian consumers went on a shopping spree in May, triggering a stunning jump in retail sales that will almost certainly help boost second-quarter economic growth beyond expectations.
The raw numbers stunned economists that had expected a modest 0.4 per cent bump. Instead, Statistics Canada said the retail sector boosted sales five times that by 1.9 per cent during the month to $40.4-billion.
Particularly meaningful for gross domestic product growth, sales in volume terms also expanded by 1.9 per cent, meaning the increase was not related to currency fluctuations.
“It’s hard to say what happened, everything went right it seems,” said Jimmy Jean, an economist with Desjardins Capital Markets.
“We’re probably seeing a little bit of catch-up because since 2011 sales have been almost flat. In the first quarter we had consumer spending rising 0.9 per cent (annualized). It was one of the weakest numbers since the recession.”
For the second quarter which began in April, however, retail sales are tacking at an eight per cent clip in volume terms.
Jean said the report puts in jeopardy the Bank of Canada’s bleak expectation for a meagre one per cent growth number in the second quarter. For GDP to drop that low after the first quarter’s 2.5 per cent expansion – and given relatively rosy numbers since – the bank would need to be proven prescient in estimating a 1.3-point hit from the Alberta floods and Quebec construction strike in June.
Other economists also doubted the quarter would show such weakness. CIBC chief economist Avery Shenfeld, who is rarely counted among the bulls on growth, believes the retail number likely means his 1.6 per cent forecast is likely a couple of ticks too low.
“With sales up 1.9 per cent in real terms, forecasts for May GDP will be revised higher, as will our forecast for Q2,” he said in a note to clients.
The Canadian dollar strengthened on the retail sales news, rising 0.32 of a cent to 96.99 US in early morning trading.
The Statistics Canada report showed strength throughout the retail sector and included a minor upward revision on April sales to 0.2 per cent.
The big contributor was motor vehicle and parts dealers, which saw sales pick up 4.3 per cent in dollar terms.
“Sales were up at new car dealers (+3.3 per cent) for a fifth consecutive month, mainly because of higher sales of light trucks,” Statistics Canada reported.
Retail sales at dealers for other types of motorized vehicles, such as RVs, motorcycles and boats, was up 13.1 per cent – more than offsetting a decline in April.
Sales at food and beverage stores rose 1.1 per cent overall as sales of alcoholic beverages increased in sync with the delayed start to the National Hockey League playoffs. Sales at supermarkets and other grocery stores rose 0.7 per cent following declines in March and April. Beer, wine and liquor store sales increased 2.2 per cent, following declines the three previous months.
Overall, sales increased in nine of 11 sectors and in all 10 provinces. The two sectors that fell were at electronics and appliance stores (down 0.8 per cent) and miscellaneous store retailers (down 0.5 per cent).
While May may be an aberration, economists cautioned the Bank of Canada will likely need to keep a close eye on household borrowing given the recent turnaround in the housing sector and now strong retail sector.
The central bank has expressed some relief in the downward track of household borrowing since last summer, when Finance Minister Jim Flaherty tightened mortgage rules. But the last two months have seen a levelling off and even reversal of the downward slide in the housing market, with sales, starts and prices all rebounding somewhat.
In last week’s interest rate announcement, central bank governor Stephen Poloz cited the constructive evolution on household imbalances as one of the factors for continuing to keep the monetary policy rate at the super-low level of one per cent.
Jean said he does not believe Poloz is likely to change his mind any time soon and hike rates, but added the bank’s governing council, and the finance minister will be wary of any renewed upward trend in household debt levels.
In the past few years, Flaherty has been the first line of defence against unsustainable levels of consumer spending. The minister has applied the breaks on mortgage rules on four separate occasions, as well as tightened bank lending practices, in an effort to rein in consumer spending.