Bank of Canada will need to cut rates more to lift consumers

Article content

New retail sales data out on Friday showed Canadians are holding the line on spending as they struggle with the double whammy of higher interest rates and inflation.

Retail sales for May contracted 0.8 per cent, falling more than the 0.6 per cent drop estimated by economists, Statistics Canada said, with a flash estimate from the data agency calling for a 0.3 per cent pullback in June.

Article content

Here’s what economists have to say about the data and what it means for the economy and the Bank of Canada, which makes its next interest rate announcement on July 24.

‘Subdued’ consumer: Alberta Central

“Consumers remain cautious with their spending,” Charles St-Arnaud, chief economist at credit union Albert Central, said in a note estimating that population growth was the only thing the kept retail sales from declining further.

Canada’s population has grown by record amounts over the last few years, providing support for the economy.

However, after adjusting for population growth and inflation, St-Arnaud said retail sales were “lower” by 2.3 per cent year over year in April. Core sales, which exclude gasoline and automobile and parts sales, likely contracted 4.6 per cent during the same time period.

St-Arnaud doesn’t think the outlook will change anytime soon despite a second widely expected cut to interest rates by the Bank of Canada. The central bank trimmed rates to 4.75 per cent from five per cent in early June. Markets are betting officials will cut by another 25 basis points on Wednesday.

Article content

Article content

“While the recent and upcoming rate cuts are expected to provide some relief, we believe consumer spending will remain subdued,” he said.

‘Picture even gloomier’: National Bank of Canada

There was plenty to be disappointed about in the retail sales numbers, National Bank of Canada economists Alexandra Ducharme and Jocelyn Paquet said, in a note.

First, the data came in well below estimates. Excluding automotive and parts sales, the drop was 1.3 per cent, they said, representing “its largest decline since July 2022.”

The pair don’t see sales perking up in the coming quarters despite more rate cuts, which they argued still leave monetary policy at “a restrictive level, meaning that the mortgage renewal payment shock continues.”