Canada’s retail sales shrink as tariffs bite, June expected to improve

Ottawa | Reuters — Canada’s retail sales shrank by 1.1 per cent in May as consumers curtailed car purchases and spent less at supermarkets, convenience stores and on alcohol, data showed on Thursday.

Retail sales – closely watched by economists as they give an indication of GDP trends – had held up fairly strongly in the last two months, as concerns around the timing and magnitude of tariffs threatened by U.S. President Donald Trump brought forward purchases.

Why it matters: Retail sales are closely watched by economist as they give indications of GDP trends.

But sales weakened as the impact of tariffs started hitting consumers and the general outlook around the economy paled.

By contrast, an early or “flash” estimate showed retail sales likely grew 1.6 per cent in June, though this figure is prone to correction, statistics agency StatsCan said.

Analysts polled by Reuters had expected a drop during May, similar to what was reported, and barring autos and auto parts, which contribute almost 30 per cent to overall sales, they had predicted a drop of 0.3 per cent.

Sales excluding autos in May were down 0.2 per cent, StatsCan added.

The biggest drop was posted in the motor vehicles and parts dealers category, where sales contracted by 3.6 per cent, after two consecutive months of increases.

The drop was led by 4.6 per cent lower sales at new car dealers, which fell for the first time since February, it said, adding that in volume terms, retail sales decreased 1.4 per cent in May.

Declines in food and beverage sales

Another declining sector was food and beverages. This category, which contributes up to 18 per cent of total retail sales, saw purchases shrinking by 1.2 per cent, led by lower transactions at convenience stores and a decline in sales of beer, wine and liquor.

Economists noted the expected rise in sales in June which could indicate that GDP might improve in the second half of the year, but said trade tensions are likely to keep consumer spending under check.

“Unless a trade deal is reached to significantly reduce U.S.-Canada tariffs … we expect households will continue to tighten their purse strings as job losses and higher prices from tariffs squeeze disposable income,” said Michael Davenport, senior economist at Oxford Economics.

The Bank of Canada will announce its rate decision next week and is likely to keep borrowing costs on hold, but most economists expect the central bank will need to start easing rates again to support the economy.

The largest increase in retail sales in May came in building materials, and garden equipment and supplies, which posted an increase of 1.9 per cent following a decline of 0.3 per cent in April.

A survey of retailers by StatsCan on the impact of U.S. tariffs and Canada’s countermeasures showed that 32 per cent of retail businesses were impacted by the trade tensions in May, compared with 36 per cent in April.

The most common impacts in May were price increases, changes in demand for products, and increased expenses for raw materials, shipping or labor, it said, citing the survey.

— Reporting by Promit Mukherjee and Dale Smith