December retail sales came in much weaker than expected dropping 5.4% in the month. A decline in activity was widely expected given earlier indications of sinking auto sales though expectations were centred around a drop in overall retail sales of 2.7%. The monthly decline was the largest in over fifteen years managing to outpace the 4.5% drop that occurred in January 1998 when an ice storm paralyzed much of Quebec. Falling gasoline prices weighed on nominal receipts at service stations though this was only a minor component of the overall decline with the volume of retail sales dropping 4.1% in the month.

Auto sales sank 15.1% in December following a 3.4% drop in November. The unit sales numbers were indicating additional weakness in December but one that was only expected to double rather than quadruple the pace of decline. Declining gasoline prices weighed on sales at service stations which dropped 11.7% in the month. However, this represented some easing from the 15.1% drop recorded in November. Gasoline prices have started to move up in January suggesting that the negative hit from this component will not continue going into the New Year.

Excluding both the motor vehicle and gasoline components, sales activity still show pronounced weakness falling 1.8% in the month indicating very weak Christmas spending. This component managed to increase 0.1% in November. Notable declines in December were recorded in building material stores (5.6%), clothing stores (3.7%) and furniture stores (2.6%).

The 4.1% decline in the volume of December retail sales adds another factor that is expected to keep the overall GDP declining in the month. Earlier reports have shown sizeable declines in the volume of both manufacturing shipments (4.4%) and wholesale trade (3.6%). In total these reports are indicating a 1.0% drop in December GDP implying a further deterioration relative to declines of 0.7% and 0.1% for November and October, respectively. This suggests a downside risk to our current forecasted growth rate for Q4 of -3.1%. As well, it suggests a much softer growth number than the 2.3% decline projected by the Bank of Canada in its January Monetary Policy Report Update. This weaker-than-expected growth is consistent with our expectation that the Bank of Canada will likely cut the overnight rate a further 50 basis points at next Tuesday's policy meeting to 0.50%.

RBC Financial Group

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.