Canada's December Retail Sales Surge 2.5%, Exceeding Expectations

Canada's retail sales experienced robust growth in December, rising 2.5% on a monthly basis, exceeding analysts' predictions, Reuters reports. Economists attribute this surge to a combination of holiday spending and a sales tax break implemented by the government.

Analysts polled by Reuters had projected a more modest 1.6% increase in monthly sales and 1.8% growth excluding automotive and parts sales. However, Statistics Canada revealed that retail sales jumped 2.5% even after removing automotive-related sales, demonstrating broad-based strength across the sector.

This strong performance is significant given that retail sales are considered a leading indicator of gross domestic product (GDP) growth. The sector contributes nearly 40% of total consumer spending, which played a crucial role in propelling Canada's economic growth during the third quarter.

The Bank of Canada, which has been more aggressive than other major central banks in cutting interest rates, has slashed its key policy rate by a cumulative 200 basis points since June, bringing it down to 3%. The aim is to stimulate the economy as inflation continues to ease.

"Even if the momentum (of retail sales) fades into the new year, these figures add to the argument for the Bank of Canada to pause at next month’s meeting," wrote Shelly Kaushik, senior economist at BMO Capital Markets, in a note to clients.

The December sales figures, which show growth across all nine subsectors, follow flat sales in November. In volume terms, sales increased by 2.5% in December. This robust performance has led to a more than 68% probability in currency swap markets that the Bank of Canada will hold its key rate steady at its next meeting on March 12. However, economists caution that this outlook could change if US President Donald Trump imposes a 25% tariff on Canadian imports in March.

A flash estimate by Statistics Canada suggests that January sales likely dipped by 0.4%. The agency will release the full report at a later date.

Canada's fourth-quarter GDP numbers, due out on February 28, are expected to show annualized growth of 1.7%. Retail sales in the fourth quarter of 2024 rose 2.4%, marking the second consecutive quarterly increase.

Food and beverage retailers, the second-largest contributor to overall sales, saw a 3.5% increase, benefiting significantly from the sales tax holiday. Motor vehicle and parts dealers, the largest contributor, experienced a 1.9% rise in sales. Total retail sales reached C$69.59 billion ($49.05 billion) for the month.