Canadian economy likely remained flat or contracted slightly in Q4

Canada's December retail sales dropped 2.2%, lower than the forecast of a moderate growth and the biggest monthly sales drop since April 2010. In terms of volume, it dropped 2.3%. Weakness was reported throughout ten of the eleven major sales categories. Major declines were reported in motor vehicle and parts dealers sales, which accounted for almost half of the overall decline. Food and beverage stores and clothing and clothing accessories also recorded noticeable declines of 1.2% and 3.6% reportedly. Furniture and home furnishings stores were the only category to report a rise in sales of 0.5%.

The retail sales figures for December are disappointing by any measure. Excluding motor vehicle sales and gasoline purchases, retail sales dropped 1.7%. This was partially due to purchases getting pulled into November as the holiday season moved earlier in the year. Even then, the November's retail sales report was relatively soft. It grew only 0.6% from October's figures.

The retail trade report highlights the Canadian economy's softness in Q4 2015. Even if the country recorded more positive December manufacturing and wholesale reports, the economy is expected to have remained flat or contracted slightly in Q4.

However, the December data is not expected to mark the start of a trend. A moderate momentum is likely to take place in 2016. Also, consumption is likely to remain an important component of the Canadian economic growth in 2016.

"Given high debt levels, we expect below-trend, but nonetheless supportive consumption growth of about 1.5% over the course of 2016", says TD Economics.