Canadian Retail Sales Show Signs of Stress as Tariffs Weigh on Consumer Confidence

The Canadian retail sector faced a mixed start to 2025, with a modest March rebound masking deeper vulnerabilities tied to U.S. tariffs and weakening consumer sentiment. According to CIBC economists, first-quarter retail sales “flatlined” compared to the 5.6% annualized growth of late 2024, signaling a pivotal moment for investors to reassess risks tied to trade tensions and monetary policy shifts.

The March Rebound: Temporary or Troubling?

March’s 0.7% month-over-month retail sales increase—ending a two-month slump—was largely driven by pre-tariff buying ahead of U.S. automotive duties effective April 3 and Canadian countermeasures. Core sales (excluding autos and gasoline) rose 0.5% in February, but this masked significant declines in discretionary categories. Building materials (-2.8%), furniture/appliances (-2.9%), and clothing (-2.7%) all posted sharp drops in February, reflecting a housing market slowdown and eroding consumer confidence linked to job insecurity.

Trade Wars and the “Grim Underbelly” of Consumer Spending

CIBC’s Katherine Judge highlighted that sectoral tariffs—now at 25% on Canadian exports to the U.S.—are fueling uncertainty. Businesses and households are delaying major purchases amid fears of further economic fallout. The auto sector’s March surge, for instance, was a “front-loaded” anomaly, with BMO’s Shelly Kaushik warning that May’s data (excluding autos) will likely show a stark decline. This pattern underscores a broader shift: consumers are prioritizing essentials (food, pharmaceuticals) while discretionary spending falters.

Monetary Policy and Rate Cuts: A Likely June Move

Judge’s analysis suggests the Bank of Canada will cut rates by 25 basis points in June 2025, citing rising unemployment risks and GDP weakness. This aligns with CIBC’s own financial disclosures, which noted increased provisions for credit losses due to “worsening economic outlooks.” The central bank’s pivot to easing could stabilize borrowing costs for consumers and businesses but may not offset the drag from trade-related inflation.

Sectoral Risks and Investment Implications

• Winners: Defensive sectors like healthcare (pharmaceuticals saw March gains) and food retailing may outperform as consumers prioritize essentials.
• Losers: Discretionary retailers (furniture, apparel) and trade-exposed industries (autos, steel) face prolonged headwinds.
• Banks: CIBC’s cautious stance reflects broader risks; however, a rate cut could temporarily boost lending margins.

Conclusion: A Fragile Recovery

The data paints a clear picture: Canada’s economy is caught in a “squishy soft” cycle, with tariffs acting as both a catalyst and constraint. While March’s rebound provided a brief reprieve, the underlying trends—slumping cyclicals, provincial disparities (Manitoba +1.8% vs. Nova Scotia -2.6%), and elevated uncertainty—are cause for caution.

CIBC’s forecast of a 25-basis-point rate cut by June is well-supported, but investors should prepare for prolonged volatility. The Bank of Canada may need to cut rates further to the neutral range (2.25%) to counter a potential recession, particularly if trade tensions persist. For now, defensive plays and sectors insulated from tariff impacts offer safer bets, while cyclical investments require a longer-term view. The Canadian retail sector’s “flatline” is not just an economic indicator—it’s a warning signal for investors to tread carefully.