Consumers appear to be ramping down their spending, according to the latest retail sales data, leading some economists to think the slowdown could act as a stay on more interest rate hikes from the Bank of Canada.

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Statistics Canada reported on July 21 that retail sales for May rose 0.2 per cent month over month, missing analysts estimates for an increase of 0.5 per cent. The national data agency also said it expected June retail sales to come in flat, a further indication of possible spending fatigue among consumers burdened by higher borrowing costs from rate increases.

When the Bank of Canada hiked interest rates to five per cent at its policy announcement on July 12, it cited overactive consumers as one of the reasons behind its decision.

“While the bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy,” the central bank said in its statement explaining the last increase.

For economists, the signs of waning “excess demand” — weak data in May and June and a downgrade for April — are unmistakable.

“There are clear signs that consumer spending is stalling,” Charles St-Arnaud, chief economist at Alberta Central, said in a note from July 21. “The moderation in consumption is even more evident when adjusting for inflation and population growth.”

Here’s what economists are saying about the latest retail sales numbers and what they mean for the Bank of Canada and interest rates.

Stephen Brown, Capital Economics

“The latest preliminary estimate implies that retail sales values were unchanged in June which, given gasoline prices rebounded last month, implies that retail sales volumes fell again. While the continued disruption from wildfire smoke in June may explain some of that weakness, it still leaves retail sales looking weaker than the bank seems to have expected when it noted in its policy statement earlier this month that ‘recent retail trade … suggest more persistent excess demand in the economy.’ With the other data this week showing that headline CPI inflation also fell by more than expected in June, we would be surprised if the bank continued to raise interest rates at its next meeting in September.”

Kyle Dahms and Matthieu Arseneau, National Bank of Canada

“The BoC was shaken by consumer strength in the first quarter, even considering population growth, which led the central bank to raise interest rates again. This renewed vigour appears to have been short-lived, if real per-capita retail sales are anything to go by, posting their worst performance in eight quarters and clearly on a downward trend since 2021. Moreover, the excess savings available for consumption may not be as high as some people think.”

Maria Solovieva, TD Economics

“May brought a sizable deceleration in retail spending growth. The only sector that points to a decisive gain is auto sales, where both nominal and unit sales were up. The rest of the categories are a mixed bag that points to consumers prioritizing spending on groceries at an expense of discretionary purchases. In real terms, second quarter real consumer spending is now tracking just slightly below one per cent quarter on quarter (annualized).

“The ‘greater persistence of excess demand’ remains a challenge for the Bank of Canada. The bank expects that household consumption will slow over the course of next year as additional hikes work their way through the economy. With today’s reading, there is evidence that this slowdown is materializing. Still, consumers have financial resources in the form of excess savings, so the path to moderation may not be a smooth one. For now, we expect that monetary policy will remain restrictive until after the first quarter of 2024.”

Andrew Grantham, CIBC Economics

“Today’s data point to sluggishness in Canadian consumer spending even before the Bank of Canada restarted its rate hiking cycle.

“While overall GDP in Q2 is still tracking close to the 1.5 per cent Bank of Canada MPR (Monetary Policy Report) forecast, today’s data suggest that consumer spending likely wasn’t a significant driver of that growth, even accounting for growth in services spending. Industry data showing strength in areas such as manufacturing and wholesale suggest that inventory accumulation or business investment may be more significant contributors, which wouldn’t be bad news from an inflation point of view.”

Charles St-Arnaud, Alberta Central

“The outlook for retail sales and consumer spending more broadly remains tilted to the downside. Consumers’ finances continue to be squeezed by an erosion in purchasing power due to high inflation and rising interest rates. The resilience in the labour market, with continued robust job growth, is likely a significant support to household spending. An underperformance in job growth, especially job losses, could lead to significant underperformance in consumer spending.”

Marc Desormeaux, Desjardins Economics

“Retail sales momentum is clearly slowing. Purchases came in below consensus estimates, and we’ve now seen weak growth or outright declines in three of the past four months, with signs of more softness in June. Another 25-basis-point interest rate hike earlier this month from the Bank of Canada should weigh on the consumer in July and beyond.

“May data and downward revisions to April figures incrementally lowered our Q2 2023 real GDP growth tracking, but we’re still in the 1.5 to two per cent (quarter-over-quarter annualized) range. That is slightly higher than the Bank of Canada’s July forecast but is not enough to change our view that the Bank will hold rates steady in September.”

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