Consumption likely to remain important growth driver of Canada’s economic growth in near term

Canada’s January retail sales grew sharply 2.1% m/m, surpassing expectations for growth of 0.6%. This was the biggest monthly growth in sales since March 2010. Meanwhile, December’s retail sales data was slightly revised upwards to a drop of 2.1%, as compared to the earlier figure of a decline of 2.2%. Sales volume, after adjusting for price changes, recorded growth of 2.1% m/m.

Most of the categories reported strength in January that declined in December. The gains were led by motor vehicles & parts (+4.8% m/m), general merchandise (+4.9% m/m), health & personal care (+3.5% m/m) and building materials (+3% m/m). Meanwhile, sales of sporting goods, books & music, and gasoline recorded declines of 3.4% m/m and 1.6% m/m, respectively. There were little changes in most of the remaining categories in January.

Strength was evident throughout all provinces except for Alberta (-0.2% m/m) and P.E.I (-0.1% m/m). Sales in New Brunswick and Quebec rose 2.9% m/m each, whereas in Manitoba and Ontario it grew almost 2.8% m/m. Sales in Newfoundland & Labrador and B.C. grew 2% m/m and 2.3% m/m, respectively. Meanwhile muted growth was witnessed in Nova Scotia (+0.3% m/m) and Saskatchewan (+0.8% m/m) in January. On an annual basis, retail sales grew in all provinces except Alberta, which recorded 2% lower than in January 2015.

Retail sales were expected to recover in January after a weak growth recorded in December. However, the extent of the rebound was more impressive than most positive forecasts. Despite the worsening sentiment, shoppers in the country were in full force in January. As such, it would seem that most of the weakness in consumption seen in Q4 2015 might have been exaggerated.

Even though the gains in retail sales are not expected to continue, the January figures nonetheless provide optimism to the already strong growth projections for Q1 2016. The optimistic sentiment is further supported by the strength seen throughout Canada. Weakness is seen only in Alberta and Saskatchewan, where the jobless rates have increased significantly.

Apart from the weakness seen in the oil sector, certain strong momentum is seen heading into 2016. Consumption is likely to continue as the vital driver of economic growth in the near term, although diminished in scope as compared to previous years. Certain additional downward pressures to consumption are expected to manifest in the medium-to-longer-run, related to households’ already high levels of indebtedness.