TORONTO — Nominal Canadian retail sales in November surged by 1.7 percent in the month following the 0.1 percent increase in October, RBC Economics reported.
Market expectations had been for a much weaker 0.2 percent increase in November, said Paul Ferley, assistant chief economist.
Expectations for a relatively modest increase were in part premised on indications of a drop in unit auto sales in November. Although sales remained at a very high annualized level of 1.98 million units, this was down from an even stronger October level of 2.01 million units.
In contrast, November’s retail sales report showed that sales at motor vehicle dealerships jumped by 3.5 percent, with the weakness on a unit sales basis potentially reflecting weakness in fleet sales, Ferley explained.
Tempering the overall increase was a 0.6 percent drop in nominal sales at gasoline stations. Statistics Canada attributed the weakness to “lower gasoline prices and unseasonably warm weather.” Weekly gasoline price surveys had been indicating rising gasoline prices in November, with the more pronounced drop in December.
Excluding the motor vehicle and gasoline components, so called core sales surged by 1.4 percent, which far exceeded expectations of some recovery from the disappointing flat sales reported for this component in October.
The strength was very broadly based and led by gains in food stores (1.5 percent), building material stores (2.4 percent), and clothing stores (2.2 percent). The strength in the latter category and a jump in electronics and appliance stores (2.1 percent) were attributed to strong “Black Friday” promotions, Ferley explained.
November retail sales rose in every province. The 2.1 percent increase in Ontario represented the largest monthly increase, although robust increases were also recorded in Quebec (1.4 percent) and British Columbia (1.8 percent). Alberta also recorded a solid 1.4 percent gain in the month, although this followed two months of declines.
Eliminating the effect of prices, the volume of retail sales in November jumped by 1.5 percent, which reversed the 0.4 percent drop recorded in October.
“The jump in retail sales volumes followed equally impressive monthly increases reported earlier this week,” said Ferley. “The volume of November manufacturing sales rose to 1.0 percent after a 1.2 percent decline in October and wholesale trade volumes jumped by 1.6 percent in November after a 0.5 percent drop in October.
“We expect this strengthening pattern to be mirrored in overall monthly GDP numbers for November, with growth projected to rise by 0.3 percent after no change in October and a 0.5 percent plummet in September,” he added.
“The rise in retail sales was encouraging and reinforced our expectation that the volume of consumer spending will rise by 2.5 percent in the fourth quarter of 2015,” Ferley explained. “With production numbers relatively flat in the quarter, however, we expect this demand will be largely met by drawing down inventories, with overall fourth-quarter GDP growth expected to remain unchanged relative to the third quarter”
The updated Bank of Canada forecast, released in conjunction with the policy announcement on Wednesday, January 20, 2016, of an unchanged overnight rate, indicated the expectation of flat GDP growth in the fourth quarter, he added.
“Thus, the economic reports released this week were consistent with policy holding steady in the near term, with the central bank continuing to monitor the data and looking for strengthening growth going into 2016 on indications of the economy’s successful reorientation to non-resource-based activity,” said Ferley.
Canada’s inflation rate rises to 1.6 percent
Canada’s CPI fell by 0.5 percent on a month-over-month, not seasonally adjusted, basis in December on the heels of the 0.1 percent dip in November, RBC reported.
The year-over-year rate of inflation picked up to 1.6 percent from 1.4 percent in November, as the monthly decline was smaller than the -0.7 percent recorded in December 2014.
Prices for clothing (-5.2 percent), gasoline (-4 percent), and air transportation fell in the month of December that more than compensated for higher prices for fresh fruit and vegetables, autos, home and mortgage insurance, and telephone services.
The decline in clothing prices was larger than expected given warmer than usual weather combined with discounting during the holiday season, said Dawn Desjardins, assistant chief economist.
Relative to a year earlier, prices for transportation were up by 0.6 percent, which was a marked change following 13 consecutive declines, as passenger vehicle prices rose by 3.1 percent and the 4.8 percent decline in gasoline prices was the smallest in more than a year.
Food price inflation accelerated in December with the year-over-year rate inching upward to 3.7 percent from 3.4 percent in November.
Prices for shelter and its operations, health, personal care, and recreation, rose at rates between 1.1 percent and 1.7 percent compared to December 2014.
Excluding eight of the more volatile components of CPI (as well as indirect taxes), core prices fell by 0.4 percent on a monthly basis in December. The monthly decrease in the core CPI reflected declines in prices for meat and seafood, clothing, and travel services.
On a seasonally adjusted basis, both the headline and core indices rose by 0.1 percent.
“Although overall prices dipped in the month, this compared to a larger decline a year ago, thereby resulting in a further uptick in the headline annual inflation rate in December,” said Desjardins. “The headline rate at 1.6 percent marked the high for 2015. The core rate conversely inched lower to 1.9 percent, which was the slowest pace of increase since July 2014.”
For the whole year, the headline rate averaged 1.1 percent while the core measure clocked in at 2.2 percent.
“The weakening Canadian dollar sets up for the core rate to remain around 2 percent in the near term, as the effect from the rising import prices is passed through to consumers, with gains tempered by the persistence of slack in the economy,” she explained.
In the policy statement and forecast update earlier this week, the Bank of Canada projected that the headline inflation rate will continue to hold below the 2 percent target throughout 2016. Low energy prices and slack weigh on the consumer prices that more than offset the upward pressure coming from the weaker Canadian dollar lifting import prices, she added.
The core measure, which excludes the cost of gasoline, is expected to remain around the 2 percent target.
The bank’s decision to hold the overnight rate unchanged was based on many factors including the assessment that the anticipated pickup in activity in the non-resource sector is occurring and that this will result in the economy shifting to a modestly firmer growth path throughout 2016,” said Desjardins.
“The bank also pointed to prospective fiscal stimulus as providing an upside risk to their outlook,” she added.
“Finally, the bank posited that a rate cut raised the prospect of a further weakening in the currency that in time would boost import prices and exert upward pressure on the inflation rate,” she explained. “This sequence of events could result in inflation expectations becoming unmoored from bank’s 2 percent target where it has been for many years.
“Looking ahead, we expect the data to show that the economy is transitioning to a firmer growth trajectory following a lackluster performance in the fourth quarter of 2015,” said Desjardins. “Against this backdrop, we expect the bank will be content to maintain the current level of policy accommodation, especially if the government provides a dose of fiscal stimulus in the upcoming federal budget.
SOURCE: RBC Economics press release