consumers and their pennies are feeling the pinch

On the heels of another data release from Statistics Canada, this time detailing retail spending, we have yet one more piece of evidence that the Canadian economy has stagnated and the Bank of Canada should cut its policy rate for a second time in two months on July 24th.

For the month of May, seasonally-adjusted retail spending in Canada—spending on things like restaurants, cars, t-shirts, bbq’s, and hot dogs—fell by 0.8% from the previous month, to $66.1 billion. Not only was this the lowest total of any month since August 2023, but spending declined across every sector except one (motor vehicles and parts dealers). Food and beverage retailers experienced the sharpest decline in spending, at 2.7% as many Canadians continued to scale back on discretionary spending—like dinners out at restaurants—in favour of servicing their debts. 

The May data follow a longer-term trend where retail spending has been relatively stagnant. Since January 2022—just before the Bank of Canada embarked on its unprecedented rate-tightening cycle—monthly retail spending in Canada has risen by only 5%, from $63.1 billion to the above-noted $66.1 billion. More notably, however, is that retail spending has actually declined in 2024 year-to-date, by 1.2%.

Much of the modest growth in retail spending since 2022, however, has come not from individuals spending more, but rather from massive population growth: quite simply, Canada has many more people today than at the beginning of 2022 who are spending their money. With this in mind, retail spending has actually declined since the start of 2022 when we adjust it to a per-capita measure: specifically, by 1.2% (and by 3% in 2024 alone).

There’s another consideration that really shows how much spending patterns have slowed. As we’re all too well aware, general consumer prices have increased substantially over the past couple of years, so when we adjust for not only population growth but also for inflation, retail spending in Canada has actually fallen by 11% (!) from the beginning of 2022 through May 2024.

These results are to be expected in a restrictive monetary policy environment. The Bank of Canada has set interest rates in such a way as to incentivize saving and disincentivize borrowing and spending. Even though the Bank has begun to unwind this restrictive policy with its first rate cut in June, there’s still a long way to go before we get back into a theoretical “neutral range”, where rates are no longer serving to restrict or stimulate the economy. In the meantime, there are many fixed-rate borrowers who will be renewing their mortgages in the coming months at higher interest rates and when they do, many of them will be spending more of their incomes on debt and less everywhere else, including on retail goods and services. Noting this, our view is that the Bank should not only cut its trend-setting interest rate by 25 basis points on July 24th, but also two additional times before the year is out.