07/23/2014 09:02 EDT | Updated 09/22/2014 05:59 EDT

Retail sales record second straight strong month, boosting hopes for economy

OTTAWA - A strong retail sales report for May suggests the Canadian economy has recovered from a winter hiccup and is returning to above two per cent growth.

Thanks to strong car and truck purchases, retails sales rose a better than expected 0.7 per cent in the middle month of the second quarter, building on an upwardly revised 1.3 per cent advance in April.

Analysts note real consumer spending is tracking at an annualized five per cent pace in the quarter — four times the rate of the first quarter when the economy as a whole grew by 1.2 per cent.

The gain, in conjunction with the rebounds seen in wholesale and manufacturing sales, points to an economy that is likely growing at about 2.2 per cent, or almost twice the pace of the first quarter when unusually poor weather cooled economic activity.

"Our calculations indicate that retail sales haven't fully recovered from the slump over the winter, so we wouldn't rule out further gains in June," said Capital Economics analyst David Madani. "This is broadly consistent with our second-quarter GDP growth estimate of 2.2 per cent annualized."

But Madani is not convinced the momentum will carry forward into the second half of the year, if, as he expects, the export sector continues to struggle and housing cools following a spring burst of activity.

In its latest monetary policy report, the Bank of Canada revised downward growth projections for the second and third quarters to 2.3 and 2.4 per cent respectively, also on the assumption that exports will take longer to benefit from improved conditions in the United States and the world economy.

Bank governor Stephen Poloz told reporters last week that the "serial disappointment" of the pace of the global recovery has been largely responsible for Canada's slow-growth record of late.

The May numbers were slightly stronger than economists had projected, but the details were not as strong as the headline would suggest.

Sales gains were concentrated in the new cars and trucks category, which rose 2.3 per cent to a record 197,740 vehicles sold.

Excluding autos, however, retail sales were up only 0.1 per cent for the month, below the 0.3 per cent anticipated by economists. And volume sales, which is directly tied to economic output, rose a more modest 0.4 per cent overall.

Among other sub-sectors, sales gasoline station, building material and garden equipment and supplies dealers and at home furnishings stores were all positive.

Sales at food and beverage stores, and beer, wine and liquor store fell, however.