MNI BOC State of Play: Weak Dec Retail Sales Add Downside Risk

By Yali N'Diaye

     OTTAWA (MNI) - The weaker-than-expected performance of Canadian retail

sales in December, despite a record low unemployment rate of 5.8% and 78,600 job

gains over the month, added short-term downside risk to the Bank of Canada's

growth scenario, supporting the case for a pause in March. 

     Canada retail sales fell 0.8% in December, both in volumes and in nominal

terms, marking the largest drop since March 2016.

     Sales excluding autos and parts fell 1.8%, and sales excluding autos and

gas stations dropped 2.0%, the largest decrease since January 2015. 

     --OTHER DISAPPOINTMENTS

     The disappointing retail sales performance came on the back of a nearly 15%

drop in home resales in January coinciding with the implementation of tighter

mortgage underwriting rules.

     While a drop was expected in January after sales were pulled forward at the

end of 2017 in anticipation of tighter rules, the central bank will likely want

to ensure that housing is slowing in an orderly fashion and that the scope of

the decline in existing home sales in January was an exception. 

     In addition, manufacturing sales also disappointed with a 0.3% contraction

in December, with volumes down 0.1%.

     Meanwhile, wholesale sales declined 0.5% over the month. 

     Overall, the data, while they did not prevent the fourth quarter from

posting gains, introduced a downside risk to the Bank of Canada's estimate of a

2.5% annualized real GDP growth in the fourth quarter of 2017, following a 1.7%

growth in the previous quarter.

     --CASE FOR PAUSE

     The case for a pause in the tightening process in March was already strong

following a 25 basis point rate hike on January 17, as the data-dependent

central bank monitors the impact of its rate hikes on the economy, notably on

the housing market and household debt. 

     Ongoing uncertainty about NAFTA also remains a key factor supporting the

BOC's caution.

     At the same time, the central bank recognizes the tightening conditions in

the labor market, having signaled that caution does not mean the end of

tightening, but rather a prudent approach. 

     In addition, some analysts expect the U.S. fiscal stimulus to also boost

Canadian growth, which ultimately could add pressure on the BOC to tighten

further or faster down the road, especially if wage growth continues to pick up.

     BofA Merrill Lynch, for instance, now expects four BOC hikes this year

instead of three as a result of the "sugar rush from U.S. fiscal policy." But

even then, the next hike would not come until April.

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

[TOPICS: M$C$$$]