Canadian retail sales fall in September for the first time in four months

Canadian retail sales fell 0.5% (m/m) in September after rising for four consecutive months. Today's reading came in well below the median consensus forecast of a 0.1% increase. Much of the weakness was due to lower prices as retail volumes still managed to rise by a modest 0.1%.

Sales were weak across the board, with 8 out of the 11 subsectors (representing 60% of retail trade) recording declines on the month.

Falling pump prices brought down sales at gasoline stations (-3.7%) which were a significant drag on the headline figure. Another area of weakness was sales at motor vehicle and parts dealers, which fell 0.5% after growing for seven consecutive months.

Gains and losses among the remaining subsectors evened out, as core sales (excluding autos and gasoline) were flat on the month.

Across the country, sales were down in 6 provinces with more pronounced declines concentrated in Quebec (-1.3%), Alberta (-1.1%) and Saskatchewan (-0.7%).

Despite the clear disappointment in today's retail trade report, the overall story for the third quarter as whole is a positive one. The windfall from the retroactive Universal Child Care Benefit payments that began in late July helped to prop up growth in Q3 retail volumes to 2.8% (annualized) - the best performance in a year. In conjunction with a series of other mixed reports, today's release leaves third quarter GDP growth tracking around 2.5% (annualized). Nevertheless, momentum heading into Q4 is looking weak.

Retail sales so far this year have been running at about half the pace typically seen, but that is due almost entirely to lower gasoline prices.  Indeed, retail activity has been supported by the purchase of big-ticket items (auto or housing-related) which have benefited from the low interest rate environment.

"We continue to believe that the current pace of monetary stimulus is appropriate and we expect the BoC to remain on the sidelines until mid-2017. On the other hand, south of the border, the Fed is likely to begin rate hikes in December. Such a move would nudge up long-term borrowing rates in Canada, thereby taking some steam out retail sales activity, particularly for big-ticket items. Additionally, elevated debt burdens and only moderate gains in employment suggest that overall consumer spending is likely to moderate to around 2% over the medium term - largely in line with economic activity", says TD Economics.