Retail sales flatlined in the second quarter while sales volume dropped 0.8 per cent, Statistics Canada said on Aug. 23, signs that economic activity is weakening as the Bank of Canada’s rate hikes take a deeper hold.

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Sales increased 0.1 per cent  to $65.9 million in June, led by spending at auto and parts dealers, which grew 2.5 per cent. Excluding those sales and those at gas stations, core retail sales decreased 0.9 per cent in June and 0.2 per cent in volume terms.

“The latest data continues to point to weaker economic growth going forward, which is in line with what the Bank of Canada is expecting,” Desjardins economist Tiago Figueiredo said in a note. “As such, the latest data will probably leave central bankers comfortable keeping rates on hold for the remainder of the year.”

Annualized retail sales in the second quarter dropped 0.1 per cent, a “notable step down” from the 2.6 per cent recorded in the first quarter, Toronto-Dominion Bank economist Maria Solovieva said in a note.

Policymakers will be scrutinizing retail data for signs of excess demand when they meet for the Sept. 6 interest rate decision. The Bank of Canada has raised interest rates 10 times since early 2022 to bring supply and demand back in balance, but a resurgence in inflation in July has added a layer of uncertainty to the central bank’s next move.

Still, economists are calling for another pause in September as unemployment has increased by half a percentage point since April to 5.5 per cent in July, suggesting people’s spending power is dwindling, although Statistics Canada’s advance estimate of retail sales for July shows a 0.4 per cent increase.

In June, sales at gas stations rose 0.3 per cent due to higher prices, but dropped 1.4 per cent in volume terms. Food and beverage purchases also declined in the final month of the second quarter, dropping 0.9 per cent at grocery stores, while alcohol sales declined 2.8 per cent. General merchandise store sales dropped 1.4 per cent.

E-commerce sales grew 1.1 per cent to $3.7 billion in June on a seasonally adjusted basis, accounting for 5.7 per cent of retail trade, compared to 5.6 per cent in May.

The Canadian Chamber of Commerce tracks its own set of consumer spending data and July’s figures show that nominal spending was up more than two per cent on an annual basis.

Chief economist Stephen Tapp said the chamber’s numbers shows that strong population growth fuelled by immigration and higher inflation have kept the economy chugging along. But high-frequency data shows that consumer spending pulled back by mid-June and into July, as people began to feel squeezed by interest rates, which are now at five per cent.

Tapp advised businesses to keep an eye on costs as sales are likely to come under pressure if the economy continues to slow.

“The Bank of Canada should be patient, and cautious about additional rate hikes. Although underlying inflation pressures remain problematic, we don’t need more medicine,” he said in a statement. “We just need more time for the earlier medicine to work its way through the economy.”

TD’s spending data shows Canadians remained resilient in July and the effects of federal grocery rebates could cause spending to rebound, said Solovieva.

“However, by demonstrating more resilience, (consumers will) pay the price of higher cost of future borrowing (and spending),” she said, adding that mortgages and their renewals will eat into discretionary budgets. “This means that retail sales could be the next in line to roll over.”

• Email: bbharti@postmedia.com