Gasoline prices have tumbled, but consumers are hanging on to the savings.LUKE MACGREGOR/Reuters
Though gasoline prices in January hit their lowest level since 2009, Canadians were in no hurry to spend any savings made at the pump as soft income gains have kept wallets firmly in consumers' pockets.
Excluding auto sales and gasoline, retail sales fell by 0.8 per cent month-over-month.
The adverse effects of the collapse in oil prices are strikingly apparent in Statistics Canada's latest report. Sales in Alberta have dropped for four consecutive months for the first time on record. The province has been the engine of Canada's economic growth since the end of recession, with retail sales rising more than 30 per cent since May of 2009, compared with a 20-per-cent increase for the nation as a whole.
Alberta and Saskatchewan were both in the top three for annual retail sales growth among the provinces as recently as August; now, those two are at the bottom of the pack.
When the possibility of receiving a pink slip from your employer rises, paying less to fill up an automobile does not provide sufficient motivation to boost spending elsewhere.
"Particularly in oil-producing provinces, consumers might be thinking 'sure, we're saving a little more money, but our employment prospects are dimmer,' and there is also the possibility of higher taxes down the road," said CIBC World Markets economist Nick Exarhos.
Acute weakness in gasoline sales was expected, given the extent of the dropoff in prices, but the 1.4-per-cent fall in automotive sales is cause for concern.
"For certain provinces, obviously, with employment likely to weaken from here, I don't think people are rushing out to make big-ticket purchases like a car," Mr. Exarhos said.
AutoCanada Inc., Canada's largest publicly-traded dealership group, said sales at some of its Calgary outlets fell by as much as 33 per cent in January amid the collapse in the price of oil and the effect it is having on consumer confidence in Alberta.
Vehicle sales at its Chrysler stores in Calgary fell 17.5 per cent in January, while those at its Japanese and South Korean-branded outlets in the city fell 10.2 per cent and 33.3 per cent respectively. Industry data firm R.L. Polk said retail vehicle deliveries fell 9.4 per cent in Calgary as a whole in January.
"What we're seeing out there is primarily a deterioration of consumer confidence," AutoCanada chief executive officer Tom Orysiuk told analysts and investors on a conference call Friday.
The decline in total retail sales was broad-based, falling in seven of 11 subsectors and rising in only one province – Prince Edward Island.
Canada remains, fundamentally, a consumption-based economy. Since the recession, increases in household spending have accounted for more than half of annual GDP growth in every year except 2011. But after years of driving economic growth, the Canadian consumer looks to be tapped out.
Indeed, the notion that lower gasoline prices would serve as stimulus for Canadian consumers was flawed from the onset.
The governing council of the Bank of Canada acknowledged this in January, writing "consumption growth is expected to slow as the negative terms-of-trade shock from lower oil prices leads to higher unemployment and restrains income growth and wealth."
Since rebounding in 2009, high oil prices directly supported investment and employment in energy-producing regions, and the lofty loonie that accompanied it enabled consumers across the nation to pay less for imported goods.
Canada's real gross domestic income contracted at an annualized rate of 0.4 per cent in the fourth quarter, indicating that the income generated from domestic production didn't enable consumers to purchase a greater volume of goods and services.
"The weak income growth that many Canadians are seeing appears to be offsetting these [gas] savings somewhat," said TD economist Brian DePratto.
And while Canadians aren't spending more, they're paying more for what they buy. In February, the core inflation rate rose 2.1 per cent, propped up by the weaker Canadian dollar, which raises the prices of imported goods.
The Bank of Canada believes the oil shock will be "front-loaded" in the early part of the year. The data certainly concur with the assessment that economic activity is softening briskly, but whether this storm will soon pass remains to be seen.
What should worry Stephen Poloz and his colleagues is that the Federal Reserve is not nearly as optimistic on the outlook for U.S. growth as Canadian monetary policy makers.
In its January monetary policy report, the Bank of Canada forecast real economic growth of 3.2 per cent for our neighbours to the south. This week, the Federal Reserve downgraded its projection for U.S. growth to a range of 2.3 to 2.7 per cent. A string of underwhelming economic data to open the year and the strengthening greenback which will crimp American exports, prompted this downward revision.
Economists are hopeful underlying private demand in the United States remains robust and that Canadian exports to our biggest trading partner will swell, picking up some of the slack.
But a slowing in consumer spending and a plunge in investment make for a toxic cocktail for the Canadian economy – all the more so if U.S. demand disappoints and is unable to offset enough of the damage.