‘Almost entirely price affect:’ Why Canada’s retail growth isn’t good news, explains economist

Charles St-Arnaud, chief economist at Servus, joins BNN Bloomberg to discuss the latest StatCan retail data numbers.

Canadian retail sales increased in March, but that isn’t exactly a positive thing, says an economist.

A newly released retail report from Statistics Canada shows retail sales increased by nearly a full per cent to $72.7 billion in March, where sales were led by gasoline stations and fuel vendors.

“It’s clear that’s been driven by higher gasoline prices rather than actually stronger underlying spending from households,” Charles St-Arnaud, chief economist at Servus, told BNN Bloomberg on Friday.

While retail sales increased by 12.4 per cent, the actual volume of gas sold fell by 1.9 per cent.

Beyond fuel and auto sales, core retail trade, which includes food, personal care and clothing goods, edged down 0.1 per cent. After adjusting for price changes, the total volume of goods sold decreased by 0.7 per cent.

“It’s clear that what has been pushing retail sales higher in March has been almost entirely price effect,” says St-Arnaud.

Flat sales volumes

Gas prices have skyrocketed since the war in Iran began in late February. Brent crude, the international benchmark, was trading around US$70 before the war. Prices jumped to US$100 within a week and hit a peak of US$138 in April. By Friday, Brent was at US$103, while American WTI crude sat at roughly US$96.

Now three months into the war, St-Arnaud notes that the main concern moving forward is how sustained gas prices will affect retail sales.

• The Iran war could drive up costs for petroleum-derived products like clothes and crayons

“The longer those gasoline prices remain high, the more it continues to squeeze households and reduce their purchasing power,” says St-Arnaud.

He says while preliminary estimates for April also show a positive number, it is a nominal number that only shows the dollars spent and not the amount of goods bought.

Preliminary April estimates paired with inflation data suggest sales volumes were essentially flat, says Bradley Saunders, North American economist at Capital Economics.

“It seems that the pickup in spending we saw at the start of the year, back in January and February, now looks like the Iran war has really put a stop to that,” he says.

‘Seeing some underlying weakness’

A drop in auto sales was already expected after sales spiked in February, and most sectors already looked weak in March after a very strong start to the year in January and February, says St-Arnaud.

“Which shows that already in March, already as the oil shock was starting, that consumers were not necessarily on the strongest footing,” he says.

“How much of it is a bit of a payback on that fear? We’ll have to see.”

Food prices not going down

St-Arnaud notes that food prices are unlikely to drop due to broad structural issues within the sector.

He highlights beef prices specifically, stating they will remain high because supply cannot keep up with demand.

• Ranchers feel the effects as cattle prices climb by 20% over the past year

“The cattle herd in North America hasn’t been this small in decades,” he says.

Furthermore, the high cost of fertilizer and energy will drive food prices up.

“We have to remember that in a country like Canada, everything we consume needs to be transported a vast distance, so with those higher transportation costs, some of it will have to be passed through to consumers,” says St-Arnaud.

He also says as long as energy prices fail to normalize, inflationary pressure will persist.

Bank of Canada facing tug of war

St-Arnaud says the Bank of Canada is caught in a tug-of-war between two opposing forces, which is a weak domestic economy with excess supply, and surging gas prices that threaten to ignite broader inflation later this year.

“So they need to balance those two risks,” says St-Arnaud, adding that it makes a lot of sense for the Bank of Canada to continue to hold its key interest rate at 2.25 per cent like it has been doing so far this year.

Saunders says this differs from the environment that followed Russia’s invasion of Ukraine in 2022, when consumers were still benefiting from pandemic-era stimulus and elevated spending.

St-Arnaud says the central bank will likely cut rates if energy prices normalize quickly. However, if the disruption of the Strait of Hormuz persists, the probability of a rate hike increases.

So that’s where it’s at, it’s not just hinging on Canadian domestic factor,” says St-Arnaud.

“There’s a lot of factors that are out of our control that will decide where monetary policy goes going forward.”