There is little statistical evidence yet of a double-dip recession and the overall trend in retail sales remains positive despite the setback
Harvey Enchin
Sun
The Canadian economy hit a pothole on the road to recovery this week as retail sales took an unexpected turn for the worse in July.
Economists had forecast a third consecutive rise in retail sales in July over June, with most estimates in the range of 0.5 to 0.7 per cent, and were taken by surprise when Statistics Canada reported a decline of 0.6 per cent to $34.2 billion. Retail sales have gone up in five of the first seven months of 2009.
Unable to find a better explanation for their miscue, economists blamed unusually cool summer weather for drops in beer, food and clothing sales. But that analysis is suspect given that sales in British Columbia, which enjoyed a warm and dry summer, saw sales drop by 0.8 per cent, compared with Ontario’s 0.3-per-cent dip.
In fact, consumers in the West, which outperformed the rest of the country during the boom, have been hit hardest in the recession.
Retail sales are down by 7.8 per cent from a year ago in B.C., and by 9.2 per cent in Alberta. Ontario and Quebec have seen declines of five per cent and 2.2 per cent respectively.
While lower prices at gas stations drove the decline, sales slumped in five of eight retail sectors and in every province.
It’s not a temporary blip, Allan Leighton, president of Loblaw Cos. Ltd., told a retail investor conference on Tuesday (and cited in a Toronto newspaper).
People have learned to live with less, he said, perhaps permanently.
That sobering view suggests that a consumer-led recovery could be in jeopardy.
It seems likely that spending will remain subdued as long as the unemployment rate stays at or above recent levels of 8.7 per cent nationally and 7.8 per cent in B.C.
However, that might be putting more weight on retail sales than is warranted.
Gross domestic product, the measure most commonly used to quantify changes in the economy, is calculated on a value-added basis.
Since much of what Canadian consumers buy is imported, the real impact of retail sales on GDP is not as significant as it might appear.
If a Canadian buys a car manufactured in the United States from a Canadian dealer, the values ascribed to GDP would be largely limited to those related to components made in Canada, plus the dealer’s margin and employees’ wages — not the entire cost of the vehicle.
Personal expenditure in Canada represents roughly 55 per cent the economy, that is, of GDP.
In 2008, in current dollars, personal expenditure was $891.2 billion out of a total GDP of $1.6 trillion.
Net out imports, however, and the percentage from retail sales drops to single digits because imports don’t generate value-added.
This is one reason governments are keen to encourage resource industries such as mining, forestry and oil and gas.
Virtually all of their production is value-added, which is reflected in their contribution to GDP.
That’s not to say consumer spending is not important. It is.
Consumer demand spurs other sectors of the economy, adding momentum to the recovery.
Indeed, domestic spending may play a more crucial role in the current recovery than in the past due to an absence of strong U.S. demand for Canadian exports. Nevertheless, the small decline in retail sales last month, or even another next month, probably won’t derail the economy.
After all, the trend remains positive with retail sales up more than four per cent since the beginning of the year even factoring in July’s decline, according to a report by BMO Capital Markets.
There is little statistical evidence so far to indicate a dreaded double-dip recession is in the cards.
With much of the federal government’s $48 billion in stimulus spending yet to hit the street, there is reason to be optimistic — if not cheerful — about the prospects for recovery.
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