Weakness in the retail sector continues as consumers show they are not in a mood to spend, at least not on this side of the border.
June's retail sales fell 0.4 per cent, Statistics Canada said on Wednesday, which erased a small 0.2-per-cent gain in May.
"Any way you slice it, retail sales in Canada have been weak over the past six months," said Leslie Preston, an economist at Toronto-Dominion Bank, in a research note.
"Consumers have begun the process of restraining debt growth, with overall household credit growth now at its slowest pace in 10 years, and this will weigh on spending."
The pace of consumer spending growth slowed to 0.2 per cent in the first quarter of 2012 compared with 0.7 per cent at the end of 2011.
But Ms. Preston said she expects employment to remain stable and contribute to some modest spending growth in the months ahead, which will help the Bank of Canada to justify maintaining its low overnight benchmark rate of 1 per cent.
The weak retail sales won't help economic growth in June, but strength in other areas, such as the utilities sector that is expected to see a large gains in the months related to June's hot weather, will likely lead to GDP growth of 0.2 per cent in June, said Paul Ferley, assistant chief economist at Royal Bank of Canada.
Growth for the second quarter is expected at 1.9 per cent, he said, matching the rate recorded for the first three months of the year.
Still, the sluggish spending does not bode well for retailers bracing for an onslaught of American stores set to enter the Canadian market over the next year, such as discount retailer Target Corp., Ms. Preston said.
Canadians may already be seeking out American stores before they arrive, said Benjamin Reitzes, a senior economist at Bank of Montreal.
"Perhaps one factor weighing on sales was the increased duty-free limits which took effect June 1," he said in a research note.
Canadians can now bring home up to $200 worth of goods when they visit the U.S. for more than 24 hours, up from a limit of $50 before June 1. A longer stay of 48 hours or more means Canadians can make purchases of up to $800. The higher limits were introduced in the 2012 Federal Budget.
Overnight travellers to the U.S. by car hit a two-decade high in June, Mr. Reitzes noted.
Retail sales were weak across a variety of kinds of retailers, with auto sales down 0.4 per cent, general merchandise receipts falling 1.5 per cent, and building materials showing the sharpest decline at 2.1 per cent.
Sales did edge up 1.4 per cent at what Statistics Canada calls miscellaneous stores.
Declining prices played a large role in the overall weak retail sales, but sales volumes also fell 0.1 per cent in June.