Financial Post
Published: Wednesday, July 22, 2009

OTTAWA — Canadian retail sales rose much more than expected in May after a surprise drop the previous month, Statistics Canada said Wednesday.

Sales increased 1.2% during the month to $34-billion, with gains in seven of eight sectors, led by a 2.4% increase in automotive products, the federal agency said.

“Retail sales have been generally rising since the beginning of 2009,” it said.

Most economists has expected sales to rise by just 0.5% in May after a 0.6% decline in April.

“This sturdy report marks a nice reversal from April’s sour note. It also drums home the point that Canadian consumers are not nearly as stressed as their U.S. counterparts, a point made amply clear by recent home sales data,” said Douglas Porter, deputy chief economist at BMO Capital Markets.

Canada’s economy shrank 5.4% in the first quarter of this year, its fastest pace of contraction since 1991. That followed a 3.7% decline in the fourth quarter of 2008.

On Tuesday, the Bank of Canada revised its outlook for the economy, saying it will contract 2.3% this year, which is less than the 3% drop it forecast in April. The economy is then expected to grow 3% in 2010, up from its previous 2.5% projection. In 2011, the bank forecast growth of 3.5%, which is down from its earlier call for an increase of 4.7%.

Last week, marketing and research group TNS Canadian Facts said Thursday its consumer confidence index edge up to 93.4 in July after slipping to 92 in June. However, its buy index, which monitors views on whether now is a good time to make major purchases, eased this month to 103.2 from 104.5.

“While spending here is no ball of fire, it is gradually climbing back from the lows at the start of the year, with consumers poised to moderately contribute to the recovery,” Mr. Porter said. “As the bank noted yesterday, domestic spending is on the road to recovery - the issue is exports, both because of the strong loonie and still-soft U.S. demand.”

Charmaine Buskas, senior economics strategist at TD Securities, said Wednesday’s report “does not necessarily suggest a turnaround in retail sales.”

“The backdrop for the Canadian economy remains soft, and consumers are sure to adjust their spending behaviour accordingly in the coming months,” she said.