Retail, housing driving recovery

Consumer spending and a sizzling housing market are powering Canada's economic recovery, two reports showed yesterday, suggesting a surge in growth at the end of last year will lead to a strong start to 2010.

Retail sales in December resumed their climb after a downturn in November, Statistics Canada said, although the 0.4% increase was slightly below expectations. Volumes, however, were up 0.6%.

Shoppers flocked to clothing and footwear stores after postponing purchases earlier due to unseasonably warm weather, StatsCan said.

"The Canadian consumer did a significant amount of the heavy lifting to drive expectations for a strong print in fourth-quarter GDP," said Scotia Capital economists Derek Holt and Karen Cordes in a note.

Scotia said it is possible that growth in the fourth quarter will exceed its forecast of 4.2% annualized, and that its assumption of 2.7% growth in real consumption may be too low.

Canada's composite leading indicator continued to climb in January, StatsCan also reported yesterday, although the 0.9% gain was slower than in December. Strong household spending as well as housing starts and existing home sales lifted the index while manufacturing exerted a drag.

The number of Canadians receiving employment insurance benefits fell for the third straight month in December, declining 5.1%, the agency said in another sign the recovery is taking root.

The Canadian dollar pared losses yesterday after the retail report and after the United States reported lower than expected inflation in January. The Canadian currency lost ground overnight after the U.S. Federal Reserve's surprise increase in the discount rate late on Thursday.

StatsCan will report fourth-quarter gross domestic product on March 1.

The Bank of Canada's latest forecast is for 3.3% annualized growth, but the data available so far points to a potentially sharper increase of 4% or more after a disappointing 0.4% gain in the third quarter, analysts say.

"Overall, the tone of this [retail sales] report was fairly positive, though mixed, and it suggests that consumer spending will add favourably to Canadian economic activity in December," said Millan Mulraine, an economics strategist at TD Securities.

Sales of new cars and food were lower than expected, while some had also forecast stronger gains in clothing and footwear. But analysts focused on consistent growth in sales volumes over the past few months.

General merchandise stores, which include department stores, led the charge in December with a 3.3% gain.

(prepared by Louise Egan/Reuters/National Post)