Bank of Canada rate cut grows more likely as retail sales slump – Mortgage Rates & Mortgage Broker News in Canada

Canadians continued to reduce discretionary spending in May, resulting in a drop in retail sales, with flash estimates indicating that the slump likely persisted into June.

This weak reading is yet another indicator that signals to the Bank of Canada a potential need to lower interest rates for the second consecutive time when it meets next week.

Sales fell by 0.8% month-over-month in May to $66.1 billion, Statistics Canada reported this morning. The decline in activity was widespread, with sales down in eight of nine sub-sectors, led by food and beverage retailers.

Core retail sales—which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers—were down 1.4% in May.

“Consumer spending is sinking fast and drowning,” Bruno Valko, VP of national sales for RMG, wrote in a note to subscribers, noting that consumer spending represents roughly 60% of Canadian GDP.

Statistics Canada’s current estimates are that sales slipped another 0.3% in June.

Bank of Canada rate cut odds keep growing

The likelihood of a Bank of Canada rate cut at next week’s monetary policy meeting has increased following today’s release of the latest economic data. This report, which continues a trend of downbeat economic indicators, suggests that high interest rates are beginning to significantly impact the economy.

“Canadians are getting desperate for lower rates, they need them badly,” Valko said. “Today’s retail numbers add more proof on top of the poor job numbers.”

The latest employment report showed the economy lost 1,400 jobs in June, well below economists’ expectations of a 25,000 position gain. At the same time, the unemployment rate rose to 6.4%, equating to 1.4 million unemployed individuals in June, an increase of 42,000 from May.

“Another data release, another economic indicator justifying our call for the Bank of Canada to cut the policy rate by 25 basis points at next week’s announcement,” wrote Desjardins economist Maëlle Boulais-Préseault.

“And if the headline for retail looks bad, on a per capita basis it looks even worse due to still-surging population growth,” she added. “Canadians would clearly benefit from some rate relief as they struggle with higher borrowing costs.”

BMO’s Robert Kavcic notes that the May retail sales reading is consistent with StatCan’s estimate of slower 0.1% real GDP growth for May and a sub-2% growth rate for the entire second quarter.

“Canadian consumer spending continues to struggle with the impact of past rate hikes and higher living costs,” he noted. “Like the Business Outlook Survey and inflation report earlier this week, this one is rate-cut supportive.”

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Bank of Canada Bruno Valko economic indicators economic outlook Editor’s pick Maëlle Boulais-Préseault rate cut forecasts retail sales Robert Kavcic

Last modified: July 19, 2024