Quick take

Reopenings promise short-term comfort, but inflation stalks retailers’ margins

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  • Retail sales declined by 1.8 per cent month-over-month (m/m) in December, after expanding by 0.7 per cent in November. In volume terms, sales decreased by 2.5 per cent.
  • Statistics Canada’s flash estimate for January suggests that sales increased by 2.4 per cent. However, this preliminary estimate is based on responses from less than half of the surveyed companies, so this figure will likely change.
  • Retail sales were down in all provinces. Ontario contributed the most to this month’s decline (-1.8 per cent). Meanwhile, Quebec (-1.1 per cent) and Manitoba (-1.0 per cent) experienced a more moderate contraction.
  • Sales at gasoline stations fell by 3.2 per cent in December after November’s 0.2 per cent increase. Meanwhile, sales at motor vehicle and parts dealers expanded by 0.5 per cent.
  • Core sales (excluding gasoline and motor vehicles) decreased by 2.4 per cent. Sales declined in 8 of 11 subsectors in December. Clothing stores (-11.7 per cent) and furniture and home furnishings stores (-11.3 per cent) witnessed one of the largest declines, while health and personal care stores (+0.2 per cent) showed a small gain.

Key insights:

  1. After a rough end to 2021 that spilled over into January, we expect the road ahead to be smoother. Many provinces initiated reopenings in early February, and most have already lifted capacity restrictions on retailers. Quebec’s retailers, for example, welcomed the recent news that vaccine passports were no longer mandatory to enter big box stores.
  2. As the economy reopens, we expect consumers to redirect some of their spending towards services, with the share of their budget spent on goods gradually returning to pre-pandemic levels. As a result, we forecast retail sales to contract this year, following 2021’s record decade growth, with most of the decline expected in the first half of this year.
  3. Meanwhile, high inflation remains a major downside risk for retailers. According to our latest Business Confidence survey, half of the respondents believe inflation will rise at an annual rate of 5 per cent or more over the next six months. With government support and household savings dissipating, consumers will be increasingly reluctant to accept higher prices for non-essential retail items. As a result, inflation could weigh strongly on retailers and chip away at their already low profit margins. If this trend persists, retailers would be forced to cut production and/or lay off workers both of which will drag GDP growth.

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Maxime Arseneau

Maxime Arseneau

Economist

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