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Canadian Retailers Smile, the Bank of Canada Charms And U.S. Foreign Traders Come Out Even

Canadian Retail Sales +1.2% in May

According to Statistics Canada, total retail sales in the country were +1.2% in May versus April. This was the fourth month-to-month increase in the past five reporting periods, with only April registering a small decline (-0.6%). Three-month moving average (i.e., “smoothed”) retail sales were still -5.2% versus their year-ago level. But that figure was flat when compared with what they had been over the previous four months, a good sign.

Retail sales in the auto sector were particularly notable in May. New car dealers experienced a +3.4% gain in business. The trucks category, which includes vans and sports utility vehicles, led the way. For only the fourth time in the past ten years, truck sales exceeded passenger car sales. Incentive programs and deep discounting caused sales of North-American built passenger cars to scramble out of a deep hole. In April, they had been at their lowest level since October 1982. Chrysler and General Motors emerging from bankruptcy protection, in record time, will keep attention focused on this sector.

Home centre and hardware store sales in Canada have reversed course and are on an upward path again. A couple of factors are coming into play. The big drop in housing starts from last fall has hit a floor level of about 140,000 units. Existing home sales are in hyped-up mode. The Bank of Canada’s almost non-existent overnight rate (0.25%), with its restraining impact on mortgage rates, is part of the reason for home buyer enthusiasm, along with some seemingly bargain prices. Another factor is the $1,000-plus tax incentive to undertake home renovations before early next year, as set out in the federal budget. (story continued below)

Canadian Retail Sales – Three Months Smoothed

*"Year over year" is each month versus the same month of the previous year.
Based on latest three-month averages of current dollar adjusted data (and placed in latest month).

Data source: Statistics Canada.
Chart: Reed Construction Data - CanaData.

Bank of Canada Revises GDP Forecast Upward

The Bank of Canada has turned more optimistic about the prospects for the Canadian economy. Gross domestic product (GDP) change for this year is now expected to be -2.3% versus an earlier forecast of -3.0%. A return to economic growth is anticipated in this current quarter, the third of 2009. The BoC is expecting GDP growth to be +3.0% in 2010 and +3.5% in 2011. These are pretty optimistic targets. They flow from all of the monetary and fiscal stimulus that is being provided to the overall economy. Volatility and upward pressure on the loonie from commodity prices remain as risks to the outlook.  

U.S. Foreign Trade takes Pressure off Washington

There has been a remarkable improvement in the U.S. goods and services foreign trade position. It has pulled back from a level between -$700 billion USD (U.S. dollars) and -$800 from second-half 2005 to second-half 2008, to only about -$300 billion at present. Low year-over-year oil prices, weak foreign-built car sales and the recession have accounted for the turnaround. The portion of the U.S. foreign trade deficit accounted for by Canada is historically low (1.9%). China is still a major factor, however. More than 50% of the foreign trade deficit that remains for the U.S. is with the awakening dragon.

The moderation in the U.S. foreign trade deficit seems likely to be short-lived. Once American recovery gets underway, more imports will be drawn in. However, for the moment, foreign trade is not exacerbating the deficit problem that is accumulating as a result of stimulative federal government spending. This is helping the Fed maintain extremely low interest rates, which are needed to counter a negative U.S. inflation rate.