December retail sales surprised on the downside (-2.2% m/m vs. -0.6% consensus). Several factors caused the value of retail sales to fall at their sharpest rate in over five years (since April 2010). First, new motor vehicle sales declined by 4% during the month. Considering the rapid accumulation of new cars on the road that occurred in 2015 and the fact that new cars are now harder to sell in oil-producing provinces, the weakness in motor vehicle sales is expected to persist in 2016. Second, in several retail sectors, the December decline came from the combination of the reversal of last November’s “Black Friday” effect and weaker holiday sales last month as consumers generally fell less inclined to open their wallets due to lower disposable income growth in 2015. Sales at clothing and accessories, sporting goods and hobby and electronics and appliance stores declined in December after posting respectable gains in November. Finally, an easing in the pace of home sales on the resale market during the month caused weaknesses in housing related expenses.
The Strong January CPI caught forecasters by surprise (0.2% m/m vs. -0.1% consensus). The main culprit boosting the cost of living was food prices. Prices of fruits and vegetables, imported for the most part at this time of the year, soared for a fourth consecutive month in January, reflecting the 9% cumulative depreciation observed in the Canadian dollar since October. For example, the 4.8% m/m increase in fruit prices is the second largest monthly gain in more than 15 years. Given the lagged pass-through effect of the lower exchange rate, core CPI inflation is likely to stay around 2.0% in 2016Q1.
The bottom line is that this very weak retail figure held down consumer spending in real terms in 2015Q4, making it likely that real GDP growth stalled for the quarter. Moreover, the strong CPI figure still does not come from tighter capacity constraints, but rather from weaker terms of trade which are negatively affecting our currency. Regardless of how gloomy these numbers are, today’s report is consistent with the latest Bank of Canada estimate of no real GDP growth for 2015Q4. We thus still do not expect further overnight rate cuts at the moment.
