Canadians have ramped up their retail spending in recent months, despite higher interest rates that are meant to slow their consumption and bring down the rate of inflation.
Retail sales rose by 1.1 per cent in April, after a 1.4-per-cent slide in March, Statistics Canada said in a report on Wednesday. The April result easily surpassed its previous estimate of a 0.2-per-cent gain. In volume terms, retail sales rose 0.3 per cent.
Further gains appear to be on the way: In its preliminary estimate on Wednesday, Statscan said retail sales rose an additional 0.5 per cent in May, although that number is subject to revision.
The resilience of the Canadian consumer has been a major theme of the economy this year. Despite a rapid series of rate hikes from the Bank of Canada that began more than a year ago, many households appear to be shrugging off the impact of those higher borrowing costs.
In the first quarter, the Canadian economy expanded at a rapid clip – fuelled in large part by a surge in household spending. This and other strong economic data convinced the Bank of Canada to resume raising interest rates after a brief pause. Earlier this month, the central bank increased its policy rate by 25 basis points to 4.75 per cent, the highest level since 2001. (A basis point is 1/100th of a percentage point.)
After Wednesday’s report, several analysts said the BoC would likely raise its benchmark interest rate by another 25 basis points at its next decision on July 12.
The recent increases in retail spending are “not what the Bank of Canada will be looking for as it hopes to slow domestic demand,” Randall Barlett, senior director of Canadian economics at Desjardins Securities, said in a note to clients.
Statscan’s report showed a broad-based increase in retail spending. Sales rose 3.3 per cent at general merchandise retailers in April from March. Receipts were up 3.1 per cent at clothing retailers and by 1.5 per cent at food and beverage retailers.
There was, however, a decline at stores catering to the housing market. For instance, sales fell 1.3 per cent at electronics and appliance retailers in April. While real-estate activity has perked up in the spring, the recent rise in borrowing rates could put further pressure on the sector.
In a recent speech, Bank of Canada deputy governor Paul Beaudry said the central bank was “surprised” by the strength of consumer spending in the early months of 2023.
“We had expected growth in demand for services to start to ease off, but Canadians continue to catch up on travel, entertainment and restaurant spending. More unexpected was the strength of the rebound in goods spending,” Mr. Beaudry said on June 8.
In a summary of deliberations for its June rate decision, which was published on Wednesday, the Bank of Canada’s policy-setting governing council pointed to several possible explanations for robust spending. These included the delayed effects of higher interest rates, pent-up demand for services, the easing of supply-chain issues, strong population growth and continued strength in the labour market, among other reasons.
“While it was impossible to declare any one explanation as predominant, members were of the view that with the resurgence in household spending growth, the pickup in consumer confidence, and the slowing in disinflationary momentum, monetary policy did not look to be sufficiently restrictive,” the summary of governing council deliberations read.
In recent months, federal and provincial governments have provided financial assistance to many households, ostensibly to help them with higher living costs. (Economists have criticized some of these measures for supporting consumption and undermining efforts to rein in inflation.)
The Bank of Canada is raising interest rates to reduce demand and wrestle inflation back to its 2-per-cent target. In April, the consumer price index rose at an annual rate of 4.4 per cent. While that’s down from a peak of 8.1 per cent last June, the rate ticked up from 4.3 per cent in March.
Members of the bank’s governing council expressed concern that inflation could get stuck “materially” above the 2-per-cent target, according to the summary of deliberations.
The central bankers “agreed that the economy remained clearly in excess demand and that the rebalancing of supply and demand was likely to take longer than previously expected,” it read.
In April, the Bank of Canada projected that inflation would ebb to around 3 per cent in the summer, before returning to its 2-per-cent target in late 2024. The bank will update its economic forecasts at the rate decision in July.