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CONSUMERS WAKE UP BEFORE TAX CREDIT GOES-GOES

• Retail sales increased by 0.7% in January; after adjusting for inflation, sales increased by 0.1%

• Sales were overwhelmingly driven by sectors which have benefitted from the home renovation tax credit; much of January’s sales were driven by Canadians trying to get in last minute purchases in time for the credit’s expiration that month.

(Learn more about the Land transfer tax credit)

The retail sector has almost recovered to its pre-recession level. January’s 0.7% increase, the sector’s 10th gain in the last 13 months, puts total retail sales on the cusp of the peak hit in September of 2008; a mere 1.3% away. However, much of the strength was due to price effects which, after being stripped, mitigated growth to just 0.1%.

This month’s report was very much a story of Canadian consumers rushing to get big purchases before the home renovation tax credit expired. Though six out of eight major subsectors posted gains, the overall strength in sales was demonstrably driven by sectors that specifically benefitted from the tax credit that expired, also, in January. Sales of home furnishings grew by 15.1%, the highest on record, and were driven primarily by sales of floor coverings, accord­ing to Statistics Canada. Also rising by record paces were sales at home centres and hardware stores, and specialized building materials and garden stores which grew by 6.0% and 14.0%, respectively – both the largest gains posted in the last half decade in those sectors. Also contributing to the overall gain were sales at the gas pumps and at supermarkets which grew by 1.5% and 2.0%, respectively. Mitigating the overall strength was the auto sector which, overall, posted a decline of 1.5%. This was driven largely by a 6% decline in used cars and parts, and a 2.3% decline in new car sales. Interestingly, sales at supermarkets overtook new car sales as the single largest retail sector at the tail-end of 2008. This has not happened since the mid-1990’s and certainly demonstrates how much of an impact the recession had on discretionary consumer spending.

In terms of the provincial breakdown, the gains were broad based with 7 of 10 provinces posting gains. Ontario, Quebec, and Alberta led the pack, while Newfoundland and Labrador, and PEI reported significant gains, as well.

Alongside last week’s employment numbers, this month’s retail report provides further evidence of a solidifying recovery here at home. With the unemployment rate continuing its descent and jobs being added back to the economy, personal income growth will likely feed into future spending growth. TD Economics’ forecast of 3.1% annual real GDP growth in 2010 will be driven by a 3.3% annual gain in consumer spending.

 Francis Fong, Economist
416-982-8066

R.Paul Chadwick
TDCanada Trust
Manager Residential Mortgages
Tel: 905 334 4066
Fax: 905 332 1619
paul.chadwick@td.com

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