Canada: Slower Employment Growth Will Impact Consumption Expenditure

• In real terms, retail trade grew at an annual rate of 1.2% in the first two months of 2013Q1 relative to 2012Q4. However, an indepth examination of retail sales by store category does not allow us to determine whether this moderate growth reflects a return to par after dealerships registered record sales for new automobiles in 2012Q4, or whether it reflects the beginning of a more durable trend.

• The outlook for the labour market is what is prompting us to forecast a slowdown in the growth of aggregate real household disposable income. The sharp drop in housing starts since the beginning of 2013, and the austerity that has marked most of the recent budgets tabled by the federal and provincial governments lead us to believe that the construction industry and the public sector will not contribute to job growth in 2013 and 2014. Furthermore, a weakness in business profits is not supportive of an acceleration of job creation in the private sector.

• Even if we allow for a drop in the household saving rate, our forecast still ends up calling for moderate growth in real consumption expenditure in 2013 and 2014.

Consumption expenditure and retail trade
According to the System of National Accounts, real household consumption expenditure in Canada grew at an annualized rate of 2.8% in 2012Q3, and 2.7% in 2012Q4. This begs the question whether such a pace can be maintained in 2013.

In Canada, the Monthly Retail Trade Survey is the lone comprehensive source of data on consumption expenditure so far in 2013, as the January and February sales statistics have already been released. However, retail trade covers only a portion of consumption expenditure, namely, spending on goods. In 2012, expenditure on consumption goods accounted for only a little less than 45% of total consumption expenditure, the rest consisting of expenditure on services. The truth of the matter, though, is that retail trade is far from corresponding precisely to expenditure on consumption goods.

For example, monthly retail trade does not cover electricity consumption or sales of other goods by non-store retailers, such as those directly sold and delivered to customer’s premises, those made door to door, through mail-orders, in-home demonstration, electronic shopping and those made through automatic vending machines. In principle, these sales are included in expenditure on consumption goods under the System of National Accounts. Furthermore, the value of retail sales does not include sales taxes, whereas consumption expenses do.

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