Canadian consumers are no longer pulling their weight in the country's economic recovery, reports showed Wednesday, raising the possibility that the economy will shrink in July for the first time since August 2009.
Economists and policymakers have long anticipated a slowdown in consumer spending after it powered Canada's torrid growth rates in late 2009 and the start of this year. But so far there is little sign that other segments of the economy are compensating by picking up the slack.
After disappointing July numbers on exports, manufacturing, wholesale trade and housing, markets had pinned hopes on retail sales to nudge the economy into growth territory.
But the report showed retail sales for July unexpectedly slipped 0.1 percent from June as consumers shied away from home-related purchases such as furniture and electronics, offsetting a rise in car sales, Statistics Canada said.
It was the fourth straight month of flat or declining sales, disappointing forecasts for a 0.6 percent gain. Excluding autos, sales fell 0.4 percent and in volume terms, they were down 0.2 percent.
Canada's dollar dropped versus the U.S. currency after the release of the data.
Economists said the reluctance to spend may be temporary due to a new tax regime and other factors, but they were still hard-pressed to find any encouraging details in the report.
"The big picture is not a pleasant one to watch ... (the retail sales decline) together with earlier reported declines in real manufacturing and wholesaling, will weigh on July GDP," said Krishen Rangasamy of CIBC World Markets.
The news reinforces expectations the Bank of Canada will hold its key interest rate unchanged for the rest of the year after hiking it three times since June to 1 percent.
"It adds to the body of uncertainty over the strength and sustainability of the Canadian economic recovery as well as clouding the outlook on Bank of Canada policy," said Stewart Hall, economist at HSBC Canada.
Although the composite leading indicator exceeded expectations in August with a 0.5 percent increase, once again the gains rested entirely on a rebound in the hard-hit manufacturing sector, while the housing index tumbled.
The data on Wednesday prompted Canadian Imperial Bank of Commerce to cut its economic growth forecasts and predict the central bank won't hike rates until the second quarter of 2011.
Annualized economic growth was 2 percent in the second quarter, down from rates of 5.8 percent and 4.9 percent in the previous two quarters. CIBC sees another three quarters of growth below 2 percent, and a growth rate of 1.9 percent in 2011.
It cites the eventual loss of construction and public sector jobs when government stimulus spending fades, as well as a slowdown in housing and consumer credit as reasons consumer spending will remain tepid through next year.
"Not surprisingly, the Canadian recovery didn't play out as advertised," the report said.
"Growth in the second half of the year will be only a fraction of the Bank of Canada's July ... forecast."
Retailers reported lower sales in five of 11 sectors, Statscan said. Furniture and home furnishings stores saw the biggest decline, with sales tumbling 8.4 percent after climbing for the past 1-1/2 years.
The largest increase was in general merchandise stores, with a 2.4 percent gain. Sales of motor vehicles and parts rose 1 percent, led by new car dealers.
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