Retail Sales Rise, but Dark Clouds are Lurking During the Holiday Season

• Retail sales rose by 1.6 per cent month-over-month (m/m) in October, after posting a 0.3 per cent contraction in September. In volume terms, sales increased by 0.9 per cent.
• Statistics Canada’s flash estimate for November’s retail sales suggests that sales increased by 1.2 per cent. However, this preliminary estimate is based on responses from 40 per cent of the surveyed companies, so this figure will likely change.
• Retail sales were up in 9 of 10 provinces. Ontario posted the largest increase of all provinces, rising 1.9 per cent, while Alberta (+3.8 per cent) also showed a strong gain. Meanwhile, sales in Quebec (-0.2 per cent) experienced the only contraction.
• Sales at gasoline stations were essentially flat in October, even though gas prices were 5 per cent higher in October compared to the previous month. Meanwhile, sales at motor vehicle and parts dealers rose by 2.2 per cent.
• Core sales (excluding gasoline and motor vehicles) increased by 1.5 per cent. General merchandise stores (+2.8 per cent) witnessed the largest increase, while hobby and sporting goods stores (+17.5 per cent) also showed a significant gain.

Key insights:

1. Retailers joined manufacturers by posting a healthy gain in sales in October, making it tempting to believe that the supply crunch is getting better. But today’s release is not as positive as it may seem. In volume terms, retail sales are roughly in line with where they were in August, and sales at motor vehicle and parts dealers (an industry hit hard by the shortages) remain below levels from much of this year. Besides, don’t forget that consumer prices haven’t shown signs of decelerating just yet, signaling that supply disruptions are still an issue in Canada.
2. Speaking of inflation, retailers are in a precarious situation when it comes to prices. When demand is strong—as it is now—companies can more easily pass higher prices to consumers. But as the level of savings in the economy continues to dissipate, consumers will be less willing to accept higher prices for discretionary retail items. Considering that, even in normal times, the retail sector already faces razor-thin margins, many companies could risk falling into the red if prices don’t decelerate soon, especially if they can’t purchase enough inventory to stock their shelves. In addition to pandemic-related supply challenges, the recent floods in B.C. have washed out important distribution channels, adding another hurdle for Canadian retailers.
3. Overall, we think retail sales will fall over the next couple of quarters before posting modest growth in the second half of 2022. By then, supply bottlenecks will mostly be resolved, and retailers will be able to sell a greater amount of goods. Of course, the past few weeks have added some uncertainty to our view, as some capacity limits have been reintroduced to many retailers around the country. While we still believe widespread lockdowns are a thing of the past, nothing appears to be off the table at the time of this writing.