Canada retail sales fell 1.1% in May, largest drop in a year

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The strain on Canadian consumers became more evident last month after a rush to buy cars ahead of price increases from tariffs appeared to come to an end.

An advance estimate suggests receipts for retailers plunged 1.1% in May, the biggest decline in a year, Statistics Canada said Friday. That more than reversed April’s 0.3% gain, which was slightly lower the median projection in a Bloomberg survey of economists.

With cars and parts making up a quarter of Canadian retail sales, the stark difference in sales between those two months suggests volatility in auto purchases played a role in the weakness in the middle of the second quarter. Most of the April gains were also driven by cars. Excluding autos, sales fell 0.3% that month, a bigger decrease than economists had expected, and a second straight monthly drop.

Car sales also played a key roles in retail receipts across the country. Sales were up in five of 10 provinces, with motor vehicles and parts leading the gains in British Columbia, Ontario and Quebec — the three biggest provincial economies. On the other hand, New Brunswick saw the largest provincial decrease, led by lower sales of cars and parts.

Despite outperforming expectations in the first quarter, the Canadian economy is expected to stall or contract in the second quarter, as tariff front-running activity in trade and inventory faded. Domestic consumption was already weak in the first three months of this year, and consumers who are concerned about their job prospects will likely continue to curb their spending.

The Bank of Canada has paused its easing campaign to assess the impact of tariffs on the economy and firmness in underlying inflation. Some economists believe policymakers already arrived at the end of their easing campaign, but others still expect further reduction this year. Economic data released this and next month will influence the bank’s next decision on July 30.

The report “provides another indication that the economy is heading for a stall in Q2,” Andrew Grantham, economist at Canadian Imperial Bank of Commerce, said in a report to investors. Still, he added at least some of the May decline “could reflect a pull-back in auto sales similar to that seen in the U.S. following a couple of months of above-trend purchases.”

The data clearly reflect the impact of the uncertainty due to the trade war, Charles St-Arnaud, chief economist at Alberta Central, said in an email.

“However, recent indicators could be suggesting the weakness in May could be the peak for the negative impact of the trade war. Recent confidence indicators are suggesting an improvement in both business and consumer sentiment. While it does not signal a strong rebound in activity, it suggest that we may have seen the worst.”

Core retail sales, which exclude gas stations and car dealers, edged up 0.1% in April. The third straight monthly increase was led by higher sales of sporting goods, furniture and home furnishings, and food and beverage. The biggest decrease to core sales came from clothing and accessories, suggesting a more cautious discretionary spending.

“Looking through the tariff- and gas price-driven swings, the retail sales report points to slowing consumer spending through the spring,” Shelly Kaushik, economist at Bank of Montreal, said in a report to investors. “The weak flash estimate for May, even if largely auto-driven, is consistent with our view that the economy struggled in the second quarter.”

According to the statistics agency, 36% of retailers were affected by trade tensions in April. The most common impacts were price increases, change in demand for product and supply chain disruptions. Despite six of nine subsectors seeing monthly gains in retail sales, all of them saw a negative impact on sales.

In volume terms, total retail sales rose 0.5% in April.

The statistics agency didn’t provide sectoral or provincial details for the May estimate. The figure was based on responses from 53.8% of companies surveyed, versus the average final response rate of 90.8% of the previous 12 months.

— With assistance from Mario Baker Ramirez.