Canada Retail Sales Disappoint in September With Meager Gain -- Update

Canadian retail sales edged upward in September but fell well short of market expectations, setting the stage for a significant slowdown in economic growth in the third quarter after a strong first half of the year.

The result is also expected to keep the Bank of Canada firmly on hold with rate policy over worries about how households -- carrying elevated levels of debt -- respond to higher borrowing costs. The central bank raised rates in July and September on strong growth.

The value of Canadian retail sales in September advanced 0.1% on a seasonally adjusted basis to 49.06 billion Canadian dollars ($38.54 billion), Statistics Canada said Thursday. Market expectations were for a 0.9% gain, according to economists at Royal Bank of Canada.

On a volume, or price-adjusted, basis, retail sales fell 0.6% in September, or the biggest such decline in nine months.

On a year-over-year basis, nominal retail sales rose 6.2%.

"This is a broadly disappointing report," said Derek Holt, economist at Bank of Nova Scotia, "and adds to the list of reasons for the Bank of Canada to be on hold for an extended period."

The disappointing retail-sales report comes on the heels of a surprise drop in September wholesale transactions. For the third quarter, retail sales increased from the previous three-month period by 1.8% on an annualized basis. On a volume basis, sales fell 1.2% in the third quarter.

The retail report marks the last significant piece of September data before the release next week of third-quarter gross domestic product data for Canada. Economic growth is expected to sharply slow in the July-to-September period after expanding 3.7% and 4.5% in the first and second quarters, respectively.

Prior to the release of the retail report, economists expected third-quarter growth to track in the 1.5% to 2% range. Now, with September's retail figures in the books, economists anticipate growth closer to 1.5% with some possibility of downside risk, according to Benjamin Reitzes, economist at BMO Capital Markets.

The Bank of Canada's senior deputy governor, Carolyn Wilkins, said last week the Bank of Canada was prepared to hold tight for the immediate future because it wanted to gauge how indebted households respond to higher rates. She said potential skittishness from consumers and the risk of low inflation prompted a cautious turn at the central bank, after increasing the Bank of Canada's policy rate twice in recent months, from 0.5% to 1%.

"While Thursday's report was disappointing relative to market expectations, it should not be a game changer for the Bank of Canada," said analysts at TD Securities. At the margin, the firm said, it provides support to the central bank's cautious stance. Still, it added, growth is still tracing above estimates for potential growth -- or the level of expansion before fueling inflationary pressure -- and remains largely in line with central bank expectations.

Analysts expected higher gasoline prices to lead to a pop in retail sales in September, following a revised 0.1% drop in the previous month. Sales at gasoline stations rose 2.6% in September from the previous month to C$5.23 billion. On a price-adjusted basis, however, gasoline sales fell 2.5%.

Outlets selling furniture and home furnishings recorded a month-over-month 2.3% gain to C$1.56 billion, and receipts at building-materials stores increased 2.6% C$3.17 billion.

Weighing on the results was a 0.5% drop in motor vehicles and parts, to C$13.09 billion. Excluding the auto component, retail sales rose 0.3% in September. Also, clothing-store sales fell 3.4% to C$2.15 billion.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

November 23, 2017 10:46 ET (15:46 GMT)