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A shopper passes a sale sign at the Eaton Centre in Toronto in this file photo.

Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail

Canadian retail sales rose by much less than expected in January, adding to recent gloomy economic data that signals the economy may have contracted at the start of the year.

Retail sales increased by 0.5 per cent in January and would have fallen had it not been for a healthy auto sector, according to Statistics Canada data on Thursday. This was much less than the 1.7 month-on-month rise that market operators had expected.

The data - which helped push the Canadian dollar down to a two-week low - follows figures that showed a 1.0 percent drop in wholesale trade in January and a 0.9 percent decrease in factory sales.

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"Outside of the spirited gain in auto sales (a pace which cannot last long), Canadian retail sales continue to lose momentum. High household debt levels and weak employment growth suggest this trend will persist through early 2012," said Benjamin Reitzes of BMO Capital Markets Economics.

"With the final piece of January's GDP puzzle in place ... it looks as though the Canadian economy contracted slightly to start the year."

Sales at motor-vehicle and parts dealers were up by 3.7 per cent, thanks to a 4.6-per-cent rise in sales at new car dealers. Excluding the autos subsector, retail sales declined by 0.5 per cent in January.

The Canadian dollar slipped to break even with the U.S. dollar at $1.000, its lowest level since March 7. It was at $0.9974 (Canadian) versus the U.S. dollar, or $1.0026, immediately before the release.

Statscan reported gains in just five of the 11 subsectors it tracks, representing 52 per cent of total retail sales. In volume terms, sales grew by 0.3 per cent.

"Rather than better household fundamentals, we think this growth in sales volumes has more to do with unseasonably mild weather alongside some pent-up demand for autos," said David Madani of Capital Economics.

Sales at general merchandise stores increased by 1.7 per cent. A 5.2 per cent fall in building-material and garden-equipment and supplies dealers accounted for the largest sales decline in dollar terms in January

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Statscan revised its reading on December sales to unchanged from November from the 0.2-per-cent drop it had reported initially.

"Bad news this morning, with retailers doing much worse than expectations ... the overall picture still remains soft," said Emanuella Enenajor of CIBC WM Economics.

"Taking together the month's soft factory, wholesaling and retail print, we expect January to post a decline in activity - suggesting a soft start to the first quarter of the year."

Growth in the last quarter of 2011 fell to an annualized 1.8 per cent from 4.2 per cent in the third. The Bank of Canada, which had predicted 2-per-cent growth for the fourth quarter, said in January it expected 1.8-per-cent growth in the first quarter.

TD Securities strategist Mazen Issa was more upbeat about January GDP, forecasting the economy grew by 0.1 per cent in the month.

"Recent strength in the U.S. economy is expected to have filtered into Canada and this is likely to be more pronounced in the coming months," he said.

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