Yesterday’s release of Canadian retail sales continues a recent string of weak economic reports starting as far back as the middle of 2018.  The prospects for a recession continue to build as the fundamentals of the economy soften, especially as the consumer sector is front and centre when it comes to economic growth. Indeed, the weakness of retail sales and overall spending over the second half of the year, despite purported strong employment growth raises, many questions regarding the health of the Canadian economy and policy responses from the Bank of Canada. The Bank has signaled that it wants higher interest rates, even after raising the bank rate five times over the past 18 months. These rate hikes are now coming home to roost as retail sales have stagnated since the summer of 2018 (see accompany chart). Overall, sales in nominal terms and in volumes has been flat-lined since August. Excluding the more volatile subsectors, such as automobile sales, energy, and food, retail sales have not improved over this time period.

Source: Capital Economics, January 23, 2019

The conventional wisdom expects that a fall in energy prices to a be a positive for the economy. However, this was not the case in November. Although November’s fall in retail sales partly reflected lower gasoline prices, sales still fell in volume terms by 1.5% from the prior month. A drop-in volume terms is one of the early signs that the economy is slowing.

Turning to other sectors, energy production and investment is being curtailed as the Alberta struggles with low energy prices and inadequate transportation systems. The housing market, once a significant engine of expansion, is slowing in response to some very heavy-handed government policy moves to curtain mortgage loans instituted a year ago. And, export demand has steadily eroded since it reaching a peak in the summer of 2018. Now, retail sales are added to this list of underperforming sectors.

In its most recent policy statement earlier this month, the Bank of Canada painted a relatively positive outlook and re-iterated its intentions to raise the bank rate. As the evidence of weakness piles up, it will be very difficult for the Bank to argue that rates need to move up. The bigger question is when will rates be cut? Already we are seeing some cracks in the trend to higher interest rates. Canada’s largest bank, RBC Royal Bank, lowered its 5-year fixed mortgage rate and competing banks are expected to follow suit in response to the slowdown in mortgage loans.

Figure 2 Canadian Exports on a Decline