Retail sales slip but spending seen solid

OTTAWA (Reuters) - Retail sales unexpectedly fell 0.7 percent in February, the first decline in five months and a sign that consumer spending may be losing some of its spunk as the world and domestic economies slow.

A customer browses jewelry inside the Hudson's Bay Company's flagship Toronto store October 28, 2005. REUTERS/J.P. Moczulski

Statistics Canada said on Wednesday the weakness was spread across all types of stores after a 1.4 percent jump in retail sales in January.

Analysts surveyed by Reuters had forecast, on average, that sales would inch 0.1 percent higher.

But economists noted that sales were simply returning to normal levels after two months of hefty gains.

“We still think that consumer spending in Canada is on solid footing,” said Jacqui Douglas, economics strategist at TD Securities.

“Even if March sales come in flat, real retail sales are still on pace for a perfectly healthy 4.6 percent annualized gain in the first quarter.”

Sales grew 5.7 percent in the year to February.

The Bank of Canada said on Tuesday it expects consumer spending to moderate this year, given the uncertainty caused by the U.S. economic storm. The bank slashed its key overnight interest rate by a half-point to 3 percent as it continued the most aggressive round of monetary easing since late 2001.

Still, the latest retail sales figures are unlikely to alter the market consensus for first-quarter growth of 0.9 percent annualized. And with employment levels soaring and wages going up, Canadians have plenty of reason to spend.

“While the doom and gloomers will jump all over this one-month slide ... spending fundamentals remain sound in Canada and confidence is holding up relatively well,” said Doug Porter, deputy chief economist at BMO Capital Markets.

The median forecast in a Reuters poll of 25 analysts was for growth to slow to 0.8 percent in the second quarter before recovering to 2.2 percent in the fourth quarter.

The automotive and clothing sectors suffered the biggest monthly drops in February, falling 1.3 percent and 1 percent respectively from January, according to seasonally adjusted figures.

Excluding the heavyweight auto sector -- which accounts for about a third of all retail deals -- sales slipped 0.3 percent in February compared with market expectations of a 0.4 percent gain. The volume of overall sales fell 0.7 percent.

New car deals were 1.7 percent lower while sales of used and recreational vehicles and parts fell 2.8 percent, the biggest drop since last June.

Editing by Janet Guttsman