UPDATE 2-Canadian retail sales up 0.7 pct in May to new record

Wed Jul 23, 2014 11:18am EDT

(Add broader economic context, reaction)

By Randall Palmer

OTTAWA, July 23 (Reuters) - Strong car sales helped push Canadian retail trade up by 0.7 percent in May to a new record C$41.98 billion ($39.23 billion), Statistics Canada reported on Wednesday, pointing to continued energy in the economy despite a weak first quarter.

Sales by motor vehicle and parts dealers, which account for just under one quarter of total retail sales, were up 2.5 percent. Excluding this sector, retail sales rose 0.1 percent, and excluding the auto sector and gasoline, retail sales were down 0.3 percent. The figures are adjusted for seasonal factors.

Statistics Canada's New Motor Vehicle Sales Survey had reported a record 197,740 units sold in May.

The median forecasts in a Reuters survey of analysts were for a 0.6 percent rise in overall retail sales and a 0.3 percent gain excluding autos and parts. On Friday, Statistics Canada had reported a 2.2 percent gain in wholesale trade, marked by a 9.8 percent jump in motor vehicles and parts.

"Canada's labor market indicators were still soft in the second quarter, but activity indicators have clearly turned a corner, the most recent evidence of this being May's strong retail sales," said Bill Adams, senior international economist for PNC Financial Services Group.

"Canada's second quarter upswing is a sign that the Canadian economy was not nearly as weak as the winter's data suggested."

With the concern authorities have placed over high household debt, it remains to be seen how sustainable the retail spending is, given a year-on-year rise of 4.0 percent.

"Spending is rising faster than income, suggesting debt burdens continue to increase," Benjamin Reitzes, senior economist at BMO Capital Markets said.

He said he suspected a significant portion of auto sales were being driven by low-cost or no-cost financing, though he noted other factors including the housing market, which accounts for a sizeable share of debt accumulation.

Sebastien Lavoie at Laurentian Bank Securities said that for the second quarter and 2014 as a whole, consumption expenditures was the main driver, poised to contribute to slightly more than half of real growth in gross domestic product.

In volume terms, relevant for calculating real moves in gross domestic product, retail sales rose by 0.4 percent.

(Editing by Chizu Nomiyama)