Retail sales struggle across Canada amid weak personal credit growth
August 26, 2019
Erik Fertsman
Canadian retail trade sales numbers came out last week, and the results were kind of disappointing. They weren't surprising, but the numbers certainly don't reflect a healthy economy.
Retail sales are a backward-looking barometer of consumer health. Consumption is a huge component of GDP, and so if consumers are not out there doing their duty, then you can't really expect to have a healthy economy. Canadian banks and monetary officials are telling us everything is hunky dory. Meanwhile, analysts are looking at the data and are shaking their heads.
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National retail sales growth is near zero, contracting since summer 2017
I've put together a fancy chart that shows you total national retail sales in Canadian dollars (orange line), it's growth rate (red line), and as always, I've thrown in some credit statistics (teal and black line). Why do we focus on credit statistics? That's because our economies are credit-driven. It's always been this way and it's not going to change. As soon as you shut off the credit taps growth tends to disappear.
Here's the chart below:
Over the last 3 years we've been experiencing a retail sales slowdown across the board (red line). If you've been following our data over the last couple of months, you'll notice how there's a slowdown in pretty much every chart that begins in the summer of 2017. This moment shows up in the data everywhere as a turning point, especially in real estate statistics.
Above, we can see how retail sales growth varied between 5 and 8 percent year-over-year between 2016 and 2017. Look where we are now: growth has been hovering around 3 percent over the last 2 years. That's a 50 percent drop in growth! More importantly, we're hovering close to zero, currently registering a year-over-year change in total dollars spent of 1 percent. Don't panic, they say.
What explains this slowdown in retail sales growth? Before you automatically jump to Trump and global trade, take a look at the black line on the chart above. This is total personal loan growth, where I've combined all sorts of credit statistics like total credit card debt, personal lines of credit, and other forms of personal loans issued by commercial banks. If you look closely, you'll see how personal loan growth has been decelerating since 2017.
What this means is that folks are borrowing less money over time in this loan category, most of which ends up in various types of retails sales transactions. Think about it, what do you normally spend your personal loans on? Commercial bank credit spent on retail sales not only increases the total dollar figure of total retail sales, but it also affects retail prices. There's a correlation between commercial bank credit and prices. Commercial bank credit is inflationary, so it shows up in the consumer price index, as well. And, as I
covered last week, things are looking slumpy in the CPI because of the decelerating credit.
However, from my perspective, personal loans are not the only type of credit that manages to find it's way into retail sales transactions. Many Canadians are using mortgage products to tap into cash, which ends up being spent on retails sales in direct and indirect transactions. Some folks use equity in their homes to pay off personal lines of credit and credit card debts, for example.
While it's by no means precise, I've added total residential mortgage credit growth (teal line) to the chart above as well. It helps provide a trend perspective to the overall credit situation, and gives us a better idea of why overall retail sales growth might be doing so poorly; both mortgage and personal credit growth is slowing.
Atlantic Canada is attempting a recovery, but last year it got hammered
It's worth digging a bit deeper below the national statistics to take a look at Canada's various provinces and how they're doing.
Here's the data for two of the best performing provinces in Atlantic Canada:
As you can see, 2017 was a pivotal year that threw retails sales growth into a tumble. The tumble was actually quite severe, with sales contracting throughout numerous months as far as negative
7 percent for both Newfoundland and Nova Scotia! It's not a good time to be in sales over there, that's for sure. The latest figures show a bit of a bounce in Nova Scotia, though, registering a 5 percent growth rate in June. Meanwhile, Newfoundland is barely out of negative territory. It's a mess over there with the province is going through a relatively severe recession and, so far, 3 years worth of falling home prices.
But, as will become more evident to you throughout this article, Nova Scotia is posting the best performance in Canada at the moment. Wait, what? Atlantic Canada, where deflationary pressures are high, 3 out of 4 provinces are experiencing contractions in real estate prices, and where GDP growth is as slow as molasses is posting some of the best retails sales growth at the moment? Yep, it's all screwed up. Nova Scotian consumers are trying their best, but it's not clear yet if they'll be able to make up the ground they lost last year.
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Eastern Canada's consumers look exhausted
Here's the data for Ontario and Quebec, which both create the Eastern Canadian region:
Ontario and Quebec have the largest consumer centers, with Ontario carrying the largest credit balances when compared to the other provinces across Canada. What's happening here? We're near zero...
Both Quebec and Ontario are floating along the same wave, with 2017 also looking like a turning point in the data. It's here where the credit statistics really matter, because Eastern Canada needs to pump out so much of it in order to get retail sales growth turning over in a positive direction. And when there's weakness in Ontario, you know Canadians are really in for a time.
Consumers in Ontario are the backbone of the country's retail sales trends. If things here don't work out, everyone starts to hear about it. And, at the moment, the data is beginning to sound alarm bells. The teal and black lines on the chart above are quite reflective of what's going on in subnational provincial credit statistics, and if personal loan growth doesn't turn around soon it's going to get nasty.
Western Canadian consumers are getting clobbered
Here's the data for Alberta and British Columbia, both key provinces in Western Canada:
As you probably know, both Alberta and British Columbia are experiencing crashing home prices and rising unabsorbed new construction inventory. Dare we ask what's happening to consumers over there? Of course we should.
What do we see? We have a collapse in retail sales growth from peaks that went as high as 11 percent in BC. Now, a trough may be forming at negative 2 percent. But I don't think sales are done contracting. So let's not talk about troughs just yet. Overall, it's a pretty disastrous picture: there's a hard landing at zero going down at the moment. BC is trying to get out of negative territory, but Alberta is in the grips of no growth.
As you can see, Nova Scotia is currently posting the best sales growth in the data. But it's a small place and it means relatively little when comparing large and powerful provinces like Ontario, Quebec, Alberta, and British Columbia. Where's this all going? Well, if credit growth doesn't turn around soon it's not going to be very good for retail sales.
If you ask me, Canadian consumers look exhausted. It's not surprising, since these folks are some of the most indebted people in the world, and they're now facing all kinds of economic headwinds and pressures. To be honest, though, I'm worried about what shrinking home prices will do to them more than anything.
Cover image source: Neel Tailor
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