OTTAWA - Canadian retail sales declined more than expected in July in a broad-based retreat led by auto dealers, who had benefited from unusually robust activity in the previous month, according to figures released Thursday.
Overall retail sales fell 0.6 per cent to $37.5 billion in July after three straight monthly increases.
It was the first month-to-month decline since January, when sales fell back 0.3 per cent, and the biggest since April 2010 when there was a two per cent decline attributed mostly to weakness sales of motor vehicles and parts.
Lower sales were reported in seven of 11 subsectors tracked by Statistics Canada.
Vehicle and parts dealers accounting for most of the decline. A 3.5 per cent drop in sales at new-car dealers offset gains made in June, StatsCan said Thursday in its monthly report.
Excluding vehicle and parts dealers, retail sales were flat.
TD Economics said preliminary data suggest Canadian new vehicle sales also declined in August and predicted that they will weigh significantly on overall third-quarter retail sales.
"Looking ahead, the uncertainties surrounding the economic outlook are expected to limit the demand for new vehicles and for durable goods more generally," wrote TD economist Shahrzad Mobasher Fard.
"While a low interest rate environment should provide an offsetting impetus for consumer spending, the high level of household indebtedness will likely serve to constrain the pace at which debt is further accumulated."
Indeed, the July retail statistics cover a period when government debt problems in the United States and Europe were still simmering, and not yet threatening to boil over into the wider global economy.
The inability of Washington and governments in the eurozone to find a lasting political solution to crushing debt levels has been gathering momentum since August, when U.S. President Barack Obama and the two houses of Congress were at loggerheads over a plan to raise the U.S. government's debt ceiling.
While that crisis passed, it was soon followed by increasingly worrisome developments in Europe, where Greece requires more assistance from its partners in the 17-country eurozone and Italy -- the region's third-largest economy -- appears to be in increasingly shaky condition.
BMO Financial Group pointed to a sharp drop in world stock markets on Thursday as a factor that's weighing on consumer confidence.
The main index at the Toronto Stock Exchange tumbled more than 400 points or 3.5 per cent to below 11,500 points Thursday morning and the Canadian dollar fell 2.15 cents to 97.26 cents US, the loonie's lowest level in about a year.
"Consumer spending growth has cooled in Canada. While there are still strong supports from extremely low interest rates and a healthy job market, the deterioration in consumer confidence and ongoing turmoil in financial markets, coupled with elevated household debt, could continue to weigh in the near term," BMO said.
Despite the economic weakness on display Thursday, both TD and BMO said they continued to expect the third quarter that ends Sept. 30 will show growth in gross domestic product.
Other economists also pointed out that sales of new cars have had a major impact on overall retail sales.
"Recall that real retail sales were inflated (1.6 per cent month-over-month) in June by that unusual jump in auto sales. So the average of the two months is a better guide to consumer spending trends. As such, a 0.4 per cent month-over-month average over the past two months is a respectable, though not a robust, gain," wrote economists Ryan Bobren and Sheryl King for Bank of America Merrill Lynch.
David Madani, Canada economist for Capital Economics, also had a more positive view of preliminary auto sales figures for August than his counterpart at TD Economics.
"Following overly-depressed growth in the second quarter, July's drop in retail sales was weaker than we had expected. Nonetheless, consumer spending growth should still improve this quarter," Madani wrote.
"Judging by the increase in preliminary auto sales in August, spending appears to have held up well enough to generate positive growth, despite the bad economic news and declining consumer confidence."
Statistics Canada reported earlier Thursday that in volume terms, retail sales fell 0.9 per cent.
Declines at used-car dealers (down 2.0 per cent) and automotive parts, accessories and tire stores (down 0.4) were offset by a fourth consecutive monthly gain in the "other motor vehicle dealers" category (up 2.3).
Furniture and home furnishings stores registered a third consecutive decrease, falling 2.2 per cent. Sales at sporting goods, hobby, book and music stores fell 2.3 per cent in July, more than offsetting gains made in the previous two months. Sales at gasoline stations in July were essentially unchanged.
Food and beverage store sales rose 0.5 per cent. Sales at general merchandise stores advanced 0.8 per cent, their sixth increase in seven months.
Retail sales fell in eight provinces in July.
Ontario reported the largest decrease in dollar terms, with sales down 0.7 per cent. Sales in Alberta fell 1.2, their second consecutive decline.
Nova Scotia retailers registered a fifth straight monthly sales increase with a rise of 1.2 per cent. It was the only province where the number of new motor vehicles sold rose in July.
