Canadian Retail Sales Contract in January After Holiday Surge

Canada's retail sector experienced a decline in receipts by 0.4% in January, marking its first contraction in seven months, as reported by Statistics Canada. This follows a significant 2.5% increase in December, which was the largest jump since May 2022 and surpassed economist forecasts.

The robust spending in December was primarily attributed to a federal sales tax holiday between Dec. 14 and Feb. 15. However, the momentum did not carry over into January. Sectors that benefited from the tax exemption, such as supermarkets and beverage retailers, saw higher receipts in December.

Despite the January decline, overall retail sales remained strong in December, with increases across all nine subsectors for the first time since September 2020. All 10 provinces also reported sales gains, marking the first time since January 2023.

Interest rate cuts have also contributed to higher consumer spending in recent months, particularly for larger purchases like vehicles, which have been a key driver of sales growth. Excluding autos, receipts increased by 2.7% in December, exceeding expectations. Core retail sales, excluding gas stations and car dealers, rose by 2.5%.

In volume terms, total retail sales grew by 2.5%, the largest gain since June 2021. As inflation in Canada has remained at or below the 2% target for the past six months, retail sales, employment, and GDP data will be closely monitored by policymakers aiming to strengthen economic growth amid potential tariff war impacts.

Economists anticipate that the Bank of Canada may pause its interest rate easing cycle at its upcoming meeting on March 12, citing strong growth and persistent core price pressures. However, U.S. President Donald Trump's plans to impose tariffs on Canadian goods and the potential retaliation from the Canadian government could alter this outlook, leading to expectations for a further rate cut to 2.75%.

Statistics Canada did not provide specific details for the January estimate, which was based on responses from 57.7% of companies surveyed, below the typical response rate of 88.2%. Overall, retail sales grew by 1.3% in 2024, with auto dealerships driving the increase. In volume terms, sales rose by 0.7% during the same period.