With the economy's momentum likely to stall, economists are expecting central bank rate reductions before the end of the year
Canada’s retail sector saw its sharpest monthly decline in a year in May, signalling growing pressure on consumers and raising concerns that the economy could be heading toward a second-quarter halt, according to new data from Statistics Canada.
An early estimate from the agency showed that retail receipts fell 1.1% in May, reversing a 0.3% gain in April and surpassing economist expectations, a report from Bloomberg noted. The drop was largely attributed to a pullback in vehicle sales, which had spiked earlier in the year as consumers rushed to make purchases ahead of anticipated price hikes linked to auto tariffs.
Andrew Grantham, senior economist at Canadian Imperial Bank of Commerce (CIBC), noted that the report reinforces projections that Canada’s economy is losing momentum. In a note to investors, Grantham said the decline in the May advance estimate for retail sales “provides another indication that the economy is heading for a stall in Q2.”
Core sales show limited gains
According to Grantham, the decline in May “could reflect a pull-back in auto sales similar to that seen in the US following a couple of months of above-trend purchases.” He noted that the broader picture reveals more cautious consumer behaviour amid a weakening labour market and persistent tariff uncertainty.
“That renewed consumer caution… is likely to persist for a little while yet,” he wrote. “We continue to expect two more 25 bp (basis point) interest rate cuts by the Bank of Canada in the second half of the year to help support a recovery.”
Auto sales, which account for about a quarter of overall retail activity, were a key contributor to both April’s gains and May’s losses. Core retail sales, which exclude gas stations and motor vehicle dealers, edged up 0.1% in April, marking a third consecutive monthly gain. The increase was driven by higher sales of sporting goods, furniture and home furnishings, as well as food and beverages. However, the largest decline within core sales came from clothing and accessories, indicating more cautious discretionary spending by consumers.
The Canadian dollar weakened following the release of the retail data, according to a report from Reuters. The loonie traded 0.2% lower at 1.3730 per US dollar on Friday, extending its weekly decline to 1.1%.
The May flash estimate, based on responses from just over half of surveyed retailers, comes as the Bank of Canada pauses its interest rate easing cycle to assess the impact of recent tariffs and firm inflation trends, Shelly Kaushik, economist at Bank of Montreal, said in a report to investors.
Economists remain divided on whether further rate cuts are forthcoming, but upcoming economic data will weigh heavily on the central bank’s decision due July 30.
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