February 5, 2014

Canadian retail sales: not just a matter of water-skiing behind the U.S. speedboat

Retail sales in Canada, seasonally adjusted in current (i.e., not scaled down for inflation) dollars, were +0.6% month-to-month and +3.1% year-over-year in November 2013 (the latest reported period), according to Statistics Canada.

The upward slope of the total retail sales graph flattened out somewhat from late-2011 through the end of 2012, but it’s been rising more sharply again since then. For a number of reasons, the improvement may be difficult to maintain as 2014 proceeds.

I’ve said before that the outlook for the world economy in 2014 is in many ways a “throwback” forecast. Global growth — as was usually the case before China emerged into prominence in the 00s — will be led by the U.S. speedboat. Canada will be trying to water-ski in America’s wake.

The immediate future will apparently even include that one indispensable component of old-fashioned recovery/expansion phases, a Canadian dollar with a value sitting well below the greenback.

The Bank of Canada (BOC) used to get “huffy” whenever it was suggested that our monetary authority might have another goal in mind beyond keeping inflation at a target level. On many occasions, it has seemed that interest rates have been adjusted to influence the value of Canada’s currency.

With Stephen Poloz assuming the mantle of BOC Governor, this supposition of a secondary goal has taken more solid form, moving it up in the order of precedence.

Mr. Poloz has talked enough — probably deliberately — about Canada’s weak export performance to convince international investors to back away from the loonie.

The result has been a Canadian dollar that has fallen to around 90 cents U.S., with one brief plummet (so far) below that benchmark.

As it has in the past, the low-valued Canadian dollar will help domestic manufacturers generate more export sales.

It also has the side-benefit, from the BOC’s standpoint, of raising import prices, thereby bumping up inflation from its current anemic rate closer to the +2.0% target.

For retailers and consumers, however, there are both beneficial and detrimental implications.

It should be noted up front that the loonie’s drop in value will have a staged impact on prices.

Many firms with essential international dealings take care to protect themselves from currency fluctuations through “hedging” (i.e., taking out futures contracts to buy and sell foreign currencies).

Also, many companies have substantial inventories that will be sold or processed without a substantial impact on prices for months to come.

Or they have signed contracts with customers at already-stipulated prices.

Or they’ll take care not to alienate a satisfied customer base by raising prices too rapidly.

Snowbirds and sun worshippers will find the cost of all-season “escapes” to U.S. resorts more expensive. At the same time, the allure of Canadian destinations will receive a polish.

There will be fewer cross-border trips to shop in U.S. discount malls.

Shopping at home from Amazon dot.com (as opposed to dot.ca) and other websites in the U.S. — already burdened with higher shipping costs, plus possibly “pesky” duties — will suffer a setback.

This will help competing Canadian retailers. U.S. shopkeepers who have been trailblazers in establishing a presence north of the border will generally be glad they made the effort.

Let’s not overlook some other contentious consumer spending issues. For example, many analysts have been saying that one of the key risks to Canadian retail spending is the high debt load being carried by mortgage-bound households.

While there’s undoubtedly truth to that argument, there are other inhibiting factors that also deserve attention.

A barrel of oil is quoted in U.S. dollars. The fall in value of the Canadian dollar will make the price of gasoline more expensive, depleting the amount of money left in the family wallet or purse to spend on other items both necessary (food) and discretionary (entertainment).

In Ontario, rapid increases in the price of electricity are having a similarly detrimental effect on residents’ finances.

A deeper tax bite, in whatever form, cuts into retail spending. Toronto’s floundering (i.e., for reasons having to do with a backward-sliding celebrity mayor) city council is proposing a 2.3% property tax hike for the next budgetary period.

In other provinces, different impediments to retail spending are coming to light.

Quebec has the most heavily-mandated union presence in the country. The Quebec economic model features a close alignment of interests between the public sector, unions and big, often-government-backed corporations.

The cost of this incestuous relationship is becoming increasingly clear with each new revelation from the Charbonneau Inquiry into corruption in the province’s construction sector.

Shady characters from organized crime have been shown not only to exert an influence over the awarding of construction contracts, but also to have inappropriate relationships with the managers of the province’s largest union-backed pension funds.

A corrupting influence on politicians at all levels has been the almost inevitable outcome. Several mayors have been forced to resign in disgrace.

As a result, and over many decades, the citizens of Quebec have been paying higher taxes — in effect, “virtual” surtaxes — in order to finance graft, extortion, kickbacks and other illegal activities attached to public sector project costs.

Members of both the previously-ruling Liberals and the currently-in-charge and separatist-leaning Parti Quebecois have been implicated, to greater and lesser extents, in the dirty dealings.

How to ultimately fix these deeply-embedded and mutually-destructive inter-relationships is a huge challenge.

At the same time, at least equal media attention is being paid to the PQ’s proposed Charter of Values.

Quebec has other things to worry about than religious symbolism in the public workplace.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.

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