BUSINESS

Canada Retail Sales Increase For 3rd Straight Month In October

12/21/2011 08:39 EST | Updated 02/20/2012 05:12 EST
CP
OTTAWA - Canadian consumers have been spending far more with retailers this fall than anticipated according to monthly data released on Wednesday, although the figures also show that the East-West economic divide in the country is widening.

Canadian retail sales exceeded expectations in October, rising a solid 1.0 per cent to $38.6 billion despite waning consumer confidence, slowing income gains, record high household debt, and alarming signals from Europe.

Economists had been generally expecting the growth would be at half that rate, at 0.5 per cent.

But economists also noted Wednesday that not all parts of the country are in on the good times, and that there's an increasing gap between resource-rich Alberta and Saskatchewan and the rest of Canada, particularly Ontario and Quebec.

"The regional aspect of this report is quite eye-opening," said Douglas Porter, deputy chief economist for BMO Capital Markets.

"The fact Saskatchewan and Alberta is leading is hardly a surprise, they led the country in growth in 2011 and will lead the country in 2012, but the extent of the difference is highly unusual."

The two western provinces top the charts in the October retail sales. But more significant is that the monthly performance just adds on an already established trend.

Over the past 12 months, retail sales in Saskatchewan and Alberta have jumped 10.6 and 10.4 per cent respectively, compared to 2.6 and 1.9 per cent for Ontario and Quebec. The next nearest provinces to the leaders are Manitoba and Newfoundland, both straddling 7.5 per cent.

Most forecasters say Saskatchewan and Alberta are likely to lead the country in economic growth in 2012 by a wide margin.

The strength is based on continuing high demand and prices for commodities produced by the two provinces, particularly oil, potash and even agricultural products. That has helped keep the Canadian dollar near parity level with the U.S., which in turn has put additional pressure on exporters of manufactured goods, particularly affecting Ontario and Quebec.

Saskatchewan and Alberta also boast the lowest unemployment rates in the country, and are recipients of inbound immigration, both factors likely to push up consumer spending.

Overall, eight of 10 provinces saw a pick-up in retail sales in October, with Ontario declining by 0.1 per cent and Nova Scotia staying at the same level as September.

Scotiabank economist Derek Holt noted that retail sales were also elevated in inflation-adjusted terms — 0.6 per cent — suggesting that volume of sales were also strong.

"Therefore, most of this lift to retail sales will flow through to volume-based gross domestic product," he noted. "That’s important, because this Friday’s October GDP report was otherwise facing bleak prospects."

The Canadian consumer has been a key driver of the country's economic activity and evidence of spending supports predictions that the economy is still growing, despite increasing pressure from troubles around the globe.

After setbacks in net trade, manufacturing shipments, house starts and employment during the month, only a strong wholesale trade performance was pointing to growth. Retail sales adds to the positive side of the ledger.

Holt said it is possible Friday's growth number could come in at 0.2 per cent from September, which could set up the fourth quarter for a better than thought performance. Many still foresee GDP growing by less than two per cent on an annualized basis, well below the third quarter's 3.3 per cent expansion, however.

CIBC economist Emanuella Enenajor noted that October's sales "were encouragingly broad-based, with increases in the majority of categories, including food, gasoline and autos."

Sales at motor vehicle and parts dealers rose two per cent, mainly on the strength of a 2.4 per cent increase in sales by new-car dealers. Gasoline station sales increase 1.8 per cent, mainly due to higher prices at the pump.

Sales at food and beverage stores advanced for a fifth straight month, rising 0.6 per cent in October.

Clothing and clothing accessories stores, sporting goods, hobby, book and music stores, general merchandise store sales were all up. Furniture and home furnishings stores decreased for a second consecutive month.

The strong spending appears to belie consumer confidence surveys which suggest Canadians are worried about the future and plan to cut back.

But Porter said the confidence readings may be based on factors that don't directly relate to consumer spending habits.

"The things that have scared consumers in the past few months are the debt crisis in Europe, political instability around the world — these are not things that affect people on the ground," he explained.

"More important is that interest rates have declined, we haven't had a tax increase, and gasoline prices have eased, so what affects consumers hasn't deteriorated."

Still, most analysts expect consumer spending to slow. In the past year, retail sales have increased by 4.4 per cent, while income growth has risen by 3.7 per cent. That means Canadians have been dipping into savings to spend, normally an unsustainable behaviour.