Canadian consumers continued to spend during the holiday season, suggesting there’s still some steam left in the economy as retail sales increased in December.

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Preliminary data showed retail sales increased 0.5 per cent in the final month of the year, Statistics Canada said on Jan. 20. Sales dropped 0.1 per cent in November, stronger than expectations of a decline of 0.5 per cent. In terms of volume, purchases decreased 0.4 per cent.

The drop in November was tempered by vehicle sales, which grew 1.4 per cent as supply chain disturbances abated. But excluding those and gas station purchases, core retail sales fell 1.1 per cent, the largest decline in 11 months. E-commerce sales dropped 2.7 per cent and the share of online purchases out of all retail sales fell 0.6 percentage points compared to November 2021.

“Despite high prices and rising interest rates, consumers have yet to significantly pull back their spending,” Royce Mendes, head of macro strategy at Desjardins Group, wrote in a report to clients. “Ongoing economic momentum will likely prompt the Bank of Canada to raise rates another 25bps next week.”

The data lands at a time when the Bank of Canada is wrestling to bring price growth back to its two per cent target. The central bank will release its next interest rate decision on Jan. 25, after indicating last month it could pause increases to assess impacts from the fastest hiking cycle in its history.

Inflation has slowed, with headline growth of the consumer price index decelerating in December to 6.3 per cent year over year, down from November’s figure of 6.8 per cent.

Declining sales at grocers, home improvement and garden stores significantly contributed to November’s drop, while furniture and general merchandise purchases also fell. Lower sales at home improvement stores likely reflect the housing market downturn, Stephen Brown, senior economist at Capital Economics, wrote in a client report.

But spending during the holidays increased at bars and restaurants compared to 2021 as people enjoyed restriction-free celebrations, according to a separate report from NielsenIQ, a consumer retail analytics company. On New Year’s Eve, consumers spent about 17 per cent more than the year prior, but the number of cheques at food establishments remained flat.

Canadians are expected to pull back on spending this year, analysts said.

“With consumer confidence weak and core retail sales on a firm downward trend, the relief from higher vehicle sales will only be temporary and there are downside risks to consumption this year,” Brown wrote.

Ksenia Bushmeneva, an economist at Toronto-Dominion Bank, forecasts consumers will spend less in the second half of the year as their discretionary funds get eaten up by debt payments.

“Consumers took a breather from shopping in November, perhaps waiting for discounts and building up some financial cushion ahead of a spending-heavy December,” Bushmeneva wrote to clients. “Even as consumers appear to have kept on spending through December, they will likely need to tighten their belts this year.”

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