Retail spending slows after rapid recovery

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Canadian retail sales increased by a modest 0.6 per cent in July, a sign that pent-up demand has been satisfied after blowout gains in the early weeks of reopening.

Higher sales at auto dealers and gasoline stations helped to drive July’s gain. After removing those components, retail sales fell 1.2 per cent as home-improvement and sporting-goods stores – two areas of strength during the COVID-19 pandemic – saw buying sprees fade.

Despite a slower pace of spending, further gains are expected: In a preliminary estimate, Statistics Canada said Friday that retail sales rose 1.1 per cent in August.

“While the headline gain was a bit shy of expectations, the much bigger and more important picture is that retail and wholesale activity just carved out perfect V-shaped rebounds,” said Douglas Porter, chief economist at Bank of Montreal, in a client note. “And, that rebound was maintained in August,” he added, referencing Statscan’s early estimate.

Canadian retailers have experienced a quick recovery. Retail spending fell 31 per cent between February and April as stores were forced to shutter under pandemic restrictions. What followed was record month-to-month gains in May (19 per cent) and June (24 per cent) as lockdown restrictions were eased, bringing sales above prepandemic levels.

July’s increase was more like a “normal” report, Mr. Porter said.

During the month, scorching gains for many retailers began to dissipate. Sales at building supplies and gardening stores fell 11.6 per cent in July, but were still 4.7-per-cent higher than a year earlier. Sporting goods, hobby and book stores dropped 8.8 per cent, but were 11.4-per-cent higher than the previous July. Grocery sales fell for a fourth consecutive month, but remained stronger than before the outbreak.

“The increase in restaurant activity likely accounted for the noticeable dent in food store sales,” said Royce Mendes, senior economist at CIBC Capital Markets, in a client note.

The auto sector enjoyed a solid month. Vehicle dealers tallied a 3.5-per-cent gain in July, with used-car dealers rising 11.5 per cent. Gas stations were lifted 6.1 per cent because of higher fuel prices and more car trips.

Clothing stores continued their rebound, with sales rising 11.2 per cent to $2.5-billion in July. However, revenue was still weaker than before the pandemic.

Of late, the retail sector has been helped on several fronts. With more stores open, Canadians have been able to satiate any pent-up demand from earlier in the pandemic. Moreover, household disposable income surged 10.8 per cent in the second quarter because of historic transfers of emergency aid from the federal government. Further, with many service industries still heavily curtailed, Canadians have shifted some spending to goods.

Still, the outlook for consumption is somewhat uncertain.

“The continued federal government income support programs and low interest rates will remain supportive for consumer spending,” said Ksenia Bushmeneva, a Toronto-Dominion Bank economist, in a research note. “However, there are also significant headwinds, such as the still-high level of unemployment, uncertainty with respect to [loan] deferral programs, and rising COVID-19 cases.”

Timelier data from Canadian banks suggest consumer spending has levelled off or even fallen in recent weeks.

By the end of August, spending was slightly lower than at the beginning of the month, according to Royal Bank of Canada data. Transactions were “relatively stable” in early September compared with a year ago, but had dipped since mid-August, the Bank of Nova Scotia found.

“Most provinces show a decline since mid-August and the recent pickup in the number of COVID-19 cases could slow the recovery further,” the Scotiabank report said.

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