Strong retail sales data boost GDP prospects for Canada

With the Canadian GDP figures expected to be released this week, expectations are high for an expansion in the economy following the data points released last week.

Economists polled are forecasting a GDP growth rate of 0.3% on a month over month basis, rising at the same pace as the month before.

Official figures from Statistics Canada showed that retail sales posted a strong rebound in the month of January, rising 2.2% from December. This was the biggest monthly increase since March 2010 according to Statistics Canada and the data was seen helping push the 12-month growth rate from 4.3% to 4.5%.

Economists were expecting to see the retail sales figures rise 1.5% on a month over month basis. Data for December was also revised to show retail sales falling 0.4% as compared to a 0.5% decline that was initially reported.

Data that was more relevant to the GDP growth, such as the price-deflated sales increased 1.3% on the month which was again a record as the data was the largest gain in a year and managed to reverse the 1.0% contraction posted in December.

The broad based retail sales strength was felt across the board in nearly 10 out of the 11 sub-sectors which represented 98% of the retail trade and covered various categories from sporting goods to hobby and books. The music stores category was the sole sub-sector that posted a decline as sales edged 0.1% lower.

In dollar terms, the biggest gains came from motor vehicle and sales which posted a monthly gain of 3.8%, which was the highest since January 2016, Statistics Canada reported last week. Excluding autos, the core retail sales were also better, rising 1.7% on the month, which was the largest monthly increase since the past two years. Economists were expecting a print of 1.3% on the core retail sales.

In December, sales in the health and personal care sector fell 3.0% but this was reversed in January as the sector showed a 6.0% rebound just a month later.

Receipts at gasoline stations increased at a slower than expected pace in January. Following a 4.6% increase in December, receipts at gasoline stations rose only 0.5% in January. Excluding gas, sales increased 2.5% on the month following a 1.1% decline previously.

Excluding the autos and gas, retail sales jumped 1.9% in January coming off December's 1.5% decline and marked the biggest gains in a year. Building material and garden equipment supply sales remained flat during the month but edged higher 5.4% on a year over year basis.

New housing construction increased 8.7% compared to a year ago with gains coming from British Columbia and Ontario which posted gains of 23.8% and 18.5% respectively. On a regional basis, sales increased across all the provinces in January with Ontario topping the highest in terms of dollar value, rising 1.7%.

Statistics Canada reported that e-commerce sales contributed to nearly 2.7% of the total retail trade recorded in January. This was slightly lower from December's 3.5% but was 2.3% higher compared to a year ago.

Given the uptick in the retail sales data, the Bank of Canada is expected to remain on the sidelines for the moment. The central bank expects that consumption will remain the biggest contributor to the economic growth as the central bank projected a retail GDP growth rate of 2.1% for this year.

Besides household consumption, additional support from the government in terms of spending and exports are also expected to help support the pace of economic expansion projected by the central bank. The January 18th monetary policy meeting minutes showed the above details which also included projections that Canada's services sector will underpin the rising employment and household incomes and consumption.