Greg Gerber posted on March 20, 2009 04:01
TORONTO -- Retail sales came in stronger than expected in January, rising 1.9 percent compared to market expectations of a 1 percent gain. This increase only partially reverses the 5.2 percent drop in December.
Expectations of a solid gain in January retail sales were primarily based on indications of rising unit car sales and higher gasoline prices raising service station receipts. Both of these elements were evident in today’s report. Sales of new car rose 6.4 percent in the month following the sizeable 15.1 percent decline in December. Gasoline station sales rose 2.6 percent after three months of declines, although the increase seemed understated given that gasoline prices were up 5 percent in the month on a CPI basis.
The main source of upward surprise was the strength in retail sale excluding auto and gasoline service stations. This measure rose a strong 1.1 percent following the 2 percent drop in December. This increase was led by strong gains in sales at clothing stores (3 percent), food stores (2.1 percent) and pharmacies and personal care stores (2 percent). All of these increases followed sizeable declines in December.
The 1.8 percent rise in the volume of January retail sales represents a marked improvement from the 4 percent plunge in December and is in contrast to a number of other key January releases (e.g., manufacturing sales and wholesale trade) where sizeable declines in December intensified further in January largely as a result of the sharp reductions in auto production. The retail sales report holds the promise of preventing any further significant deterioration in the overall January GDP growth rate relative to the December’s drop of 1 percent, although our current monitoring implies a still-substantial 0.7 percent decline.
The weakness during these two months is indicative of a possible decline in first-quarter GDP at an annualized 6 percent rate unless there is a sharp rebound in February GDP. There are indications that motor vehicle production did bounce back last month; however, weakness in other sectors such as construction will likely keep overall activity flat in that month consistent with a further deterioration in first-quarter growth, said Paul Ferley, assistant chief economist at RBC Economics Research.
"This intensification of quarterly declines after the 3.4 percent drop in the fourth quarter of 2008 will result in the Bank of Canada keeping monetary conditions very accommodative," he said. "With the precedent being set by other central banks around the globe to start using their balance sheet, the Canadian central bank may opt to do so as well. It has already indicated that it will discuss its options for credit and quantitative easing in its April Monetary Policy Report.
"Any initial move to 'start printing money' will certainly include credit easing that focuses on purchases in particular asset markets, such as securitized mortgages," said Ferley. "Initiating the more aggressive quantitative easing, which entails the purchase of government bonds, is less likely, although the Bank of Canada is likely closely monitoring the response to the Fed’s introduction of this policy action earlier this week."
SOURCE: RBC Economics Research press release