BOC State of Play: Consumer Spending Strength Persists

By Yali N'Diaye

     OTTAWA (MNI) - Behind a headline figure reflecting a slower pace of retail

sales in June, data released Tuesday by Statistics Canada showed household

spending momentum actually picked up over the month, handing off a good start to

the third quarter.

     Canadian retail sales edged up 0.1% in June to a record C$49.0 billion, as

lower auto and gasoline sales offset stronger-than-expected core sales. 

     However, where analysts had expected a 0.3% gain at best, sales excluding

motor vehicles and parts rebounded 0.7% in June after edging down 0.1% in May. 

     Excluding autos and gasoline, retail sales were up 1.1% in June after

rising 0.1% in May.

     Overall, 6 of 11 subsectors posting gains, and sales volumes were up 0.5%

after increasing 1.0% in May.

     Regionally, five provinces recorded higher sales in June, including

Alberta, where sales now surpass the level they stood at prior to the oil price

slump in late 2014.

     On a real term basis, more relevant to GDP, retail sales were up 2.1% in

the second quarter, the same pace as the previous quarter.

     Although the BOC expects household consumption to slow, it had factored in

a still strong annualized GDP growth of 3.0% in the second quarter. That being

said, some analysts already expect growth to once again beat the BOC's

projection: RBC senior economist Nathan Janzen and TD economist Dina Ignjatovic

estimate second quarter GDP growth is on track for 3.7%, and CIBC analyst Andrew

Grantham estimates it at 3.5% currently.

     On that basis, the central bank could easily justify further reducing the

stimulus by removing the other half of the 50-basis-point insurance provided in

2015, especially since inflation accelerated in July for the first time in five

months.

     However, at 1.2%, total inflation remains well below the 2% target. 

     But the BOC has stressed both the temporary and global factors explaining

low inflation, while underlining its forward-looking approach, with inflation

expected to reach 2% from mid-2018.

     With the slight pick up in July, the central bank could thus explain

another rate hike in September or October.

     Beyond that, it remains to be seen to which extent growth will slow down in

the third quarter and whether wage growth picks up in a sustainable way, which

will be important in the future pace of tightening.

     With NAFTA negotiations under way, developments on that front will also be

monitored as the central bank expects exports down the road to play a bigger

role in Canada's growth.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$]