Bloomberg News

Canada’s Economy Struggles as Inflation and Sales Slow

February 22, 2013

Canada’s inflation rate fell in January to its lowest since 2009 and retail sales plunged in December, adding to evidence the country’s economy is struggling to accelerate from its slowest pace since the 2009 recession.

Consumer prices rose 0.5 percent in January from a year earlier, the least since October 2009, Statistics Canada said today from Ottawa. Retailers in December recorded a 2.1 percent drop in sales, the biggest decline in almost three years, the agency said separately.

The data suggest Canada’s economy is growing at the weakest pace since 2009 as households and businesses pare spending and the nation’s exporters struggle to sell goods abroad. Bank of Canada Governor Mark Carney said last month an increase to his 1 percent policy interest rate has become “less imminent” because the weaker-than-expected economy is keeping inflation below the 2 percent target.

“All in all, it’s two negative reports that will likely weigh on expectations of the Bank of Canada’s ability to raise rates,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS), by telephone from Toronto.

Canada’s dollar weakened to the lowest since June, depreciating as much as 0.7 percent to C$1.0256 versus its U.S. counterpart. It traded at C$1.0237 at 11:19 a.m. in Toronto. Government bonds rose, pulling the yield on benchmark 2-year debt three basis points lower to 1.08 percent.

Pared Forecasts

The central bank last month pared its forecast for 2013 economic growth to 2 percent from an October prediction of 2.3 percent, and said the economy won’t reach full output until the second half of 2014.

Today’s retail report is the last major piece of data before Statistics Canada releases fourth-quarter growth figures on March 1. The Bank of Canada projected output increased by a 1 percent annualized pace in the fourth quarter, up from the 0.6 percent pace recorded in the third quarter, yielding the slowest six-month performance since 2009.

The central bank’s projections may be optimistic. Royal Bank of Canada, Scotiabank, Canadian Imperial Bank of Commerce and Bank of Montreal published reports today forecasting fourth- quarter growth below the central bank’s estimate.

“Growth in the consumer sector appears to have disappeared in the fourth-quarter in advance of next Friday’s GDP report,” Derek Holt and Dov Zigler, economists at Scotiabank in Toronto, wrote in a note to clients.

Larger Decline

The value of retailer receipts fell in December to the lowest since September 2011, with the decline surpassing the 0.3 percent drop forecast by economists surveyed by Bloomberg News.

Automobile and parts sales fell 6.4 percent to C$8.54 billion, the agency said. Purchases at retailers excluding car dealerships fell 0.9 percent. On that basis, economists surveyed by Bloomberg forecast 0.2 percent growth.

Seven of the 11 retail categories tracked by Statistics Canada recorded declines in December, representing 58 percent of total retail trade. Electronics and appliance store retailers reported a 12.1 percent drop in sales. Department stores, sporting goods retailers and home furnishing outlets also posted declines.

Today’s reports follow other economic data releases this month that trailed median forecasts. That includes the lowest level of housing starts in January since 2009, an unexpected decline in employment the same month and faster-than-projected drops in wholesale sales and manufacturing shipments. The Citigroup Economic Surprise Index for Canada has fallen to its lowest since August.

Weaker Inflation

Inflation was also weaker than expected. Economists predicted prices to rise 0.6 percent in January from a year earlier. The central bank projected the consumer price index would increase by an average 0.9 percent in the first quarter of this year.

Food inflation slowed to 1.1 percent in January, following an advance of 1.5 percent in December, the agency said. Costs for transportation, which include gasoline, fell 0.5 percent over the 12-month period, after increasing 0.5 percent in December. Car prices fell 0.8 percent in January from a year earlier. Canadians paid 1.6 percent less for clothing last month than a year earlier, the agency said.

On a monthly basis, prices rose 0.1 percent in January, slower than the 0.2 percent economists predicted. On a seasonally adjusted basis, consumer prices fell 0.1 percent.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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