Canadian retail sales remain near 3-year low amid credit slump, weak wages
Sep 25, 2019
Erik Fertsman
Last week Statistics Canada released the latest retails sales data. This is a backward-looking barometer of consumer health, who make up a massive chunk of the economy (GDP) and debt markets in Canada. If consumers are not doing their job of spending and borrowing lots of money, then we really can't expect the economy to post any lofty numbers.
Back in August, we reported
how the retail trade sales numbers were disappointing. Meanwhile, Canadian banks and monetary officials have been telling us that everything is hunky dory and that there's nothing to fret about. But analysts who've been looking directly at the raw data know better, or at least they should.
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Retail sales growth still near 3-year low
Well, have things improved since our last consumer health check-up? Let's take a look at the data:
Sales in July, when seasonally adjusted, posted CAD $51.478 billion in sales. That's a huge pile of money. In fact, we've broken the previous record of CAD $51.470 billion in sales. So what's the problem? Well, we need to look at nominal figures, not total sales figures.
In July, retail sales growth came in at a tiny 1.18 percent on a year-over-year basis. That's up from a 0.95 percent posted back in June. Why do we describe this as a "tiny" growth rate? That's because back in 2017, retail sales were roaring between 5 and 8 percent year-over-year. Growth is down 80% from that! Clearly the situation hasn't improved since our report in August.
You can see how the teal line on the chart above looks like it has been beaten down by a large baton, forming a clear trend change that started to back during the summer of 2017. Coincidentally, this is around the same time home price growth and nominal GDP began to slump. It's all tied together by the consumer.
You might ask, what about about e-commerce sales? Don't we all buy our stuff mostly online these days?
On the chart above I've combined the retail sales and e-commerce sales in Canadian dollars. E-commerce is actually tiny when compared to the overall market spending. In July, on an unadjusted basis, e-commerce sales added up to about CAD $1.76 billion, whereas overall retail sales added up to CAD $54.483 billion. For this reason, we tend to emphasis overall retail sales, but today we added e-commerce and "electronic shopping and mail-order houses" data to our EMP Data Series, which you can find through the Canada Dashboard.
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Weak personal loan growth likely contributor
So, how do we explain the weakness we see in retail sales? Let's compare the sales data with some credit statistics:
As you might know, we've long pointed toward commercial bank credit statistics, which provide a lot of spending power to consumers in addition to their wages. When people spend this bank credit, as opposed to their hard-earned wage cash, it creates new money that has an inflationary effect on prices (therefore, boosting sales and GDP, which are measured in dollars).
Think bank mortgages and home prices; the former's growth has an inflationary effect
on the latter. Recently, bank mortgage growth has fallen by 50% since 2017, and non-bank mortgages have soared
as credit demand via consumers remains high. However, even though non-bank credit growth has been increasing substantially, it has not managed to have the same effect on home price growth as bank credit. Interesting, yeah?
Returning to the chart above, we can see how total personal loan growth (orange line) has been slumping since November 2017. We can disaggregate this total credit statistic a little bit. Credit card growth (red line) dropped significantly in December 2017. Meanwhile, personal line of credit growth stopped increasing in November 2017. A few months later, in January 2018, retail sales growth began dropping like a rock. Significant?
We think so, because as you can see on this pie chart, personal lines of credit and credit card loans make-up a huge share of total personal credit. While credit card growth has rebounded over the last year, it makes up less than 25 percent of total personal loans. Line of credits, and so total personal loan growth, has continued to decrease since November 2017. This, we believe, is one of the more significant reasons why we see low retail sales and GDP growth in Canada.
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Weak wage growth likely and significantly compounding problems
Of course, wages are also a significant source of consumer spending, and is important for sustaining debt growth and repayment. So, here's what that's looking like:
On the chart above, wage growth (dark blue line) has also struggled to pickup or post a figure above the 3.5 percent growth rate of the February 2018 high. This is not good news for those highly leveraged consumers who've loaded up on a ton of consumer credit, which now adds up to a totally insane CAD $527 billion.
Shall we go deeper? Total mortgage credit is around CAD $1.2 trillion. These wages not only need to cover those consumer loans such as credit card debt (CAD $85 billion) and personal lines of credit debt (CAD $314 billion), but also this outstanding mortgage balance. This is a really big deal: with wage growth being this low, sustainability of this debt is highly questionable. Forget about interest rates; look at that credit card debt figure, most of which costs between 10 to 20 percent! People are going to borrow at whatever the cost.
So, low wage and credit growth is undoubtedly exhibiting a "drag" effect on GDP and retail sales growth. These are vital sources of cash for the Canadian economy. What is to be done? I've said it before and I'll say it again: the Ministry of Finance must direct the commercial banks to lend for productive investment, with corporations playing a large role. Total residential business credit currently stands at a relatively small CAD $553 billion.
This figure needs to be significantly higher than the CAD $2 trillion+ worth of consumer debt to get businesses to pay significantly higher wages to consumers who clearly need to sustain a massive debt load, not to mention help contribute toward GDP (or Canada's credit rating and debt-to-GDP ratio will go to heck). If the Ministry of Finance doesn't want to pay ball, the best thing banks can do (which will make them more money anyway) is shift their lending departments toward productive investment that will
boost wages and GDP (via business and consumer spending), all while heavily curtailing consumer lending such as personal loans and mortgages.
Cover image by: Priscilla Du Preez
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