Retail Sector Sputters as Canadian Consumers Face Crosscurrents of Policy and Preference

Canadian retail sales have stumbled into 2025, with a second consecutive monthly decline raising concerns about the durability of consumer spending. The latest data from Statistics Canada shows retail sales fell by 0.4% month-over-month (m/m) in February, aligning with consensus expectations from MUFG analysts. This follows January’s sharper 0.6% drop, marking a sharp reversal from the 2.6% surge in December 2024. The back-to-back declines underscore a sector grappling with lingering policy shifts, uneven regional performance, and shifting consumer priorities.

The Decline in Discretionary Spending

The January downturn was disproportionately driven by motor vehicle and parts dealers, which plummeted by 2.6%. New car dealers saw sales collapse by 3.2%, while automotive parts retailers fell 2.8%. This contraction contrasts with a 1.6% rise in used car dealerships, suggesting a shift toward more affordable options amid tighter budgets.

The weakness in motor vehicles and parts has ripple effects. Core retail sales (excluding motor vehicles and gasoline) also contracted in January, dropping 0.2%, driven by a sharp 2.5% decline in food and beverage retailers. Supermarkets led the slump, falling 3.4%, while beer, wine, and liquor stores dipped 2.0%. These trends hint at a broader retrenchment in discretionary spending, even as some sectors like furniture and home furnishings posted a robust 3.0% increase, the largest gain in core retail.

Regional Disparities and Policy Hangovers

Geographically, the decline was uneven. Quebec saw the sharpest contraction (-2.7%), followed by Ontario’s 0.9% drop, while Saskatchewan bucked the trend with a 2.7% increase. Analysts attribute this divergence to provincial economic dynamics, with energy-producing regions like Saskatchewan benefiting from commodity price stability.

The data also highlights the lingering impact of temporary policy changes. The end of the GST/HST holiday and federal electric vehicle rebates, which inflated December sales, likely contributed to the January slump. Statistics Canada’s advance February estimate—another 0.4% decline—suggests the drag persists, with tariff-related uncertainties and inflationary pressures further clouding the outlook.

Consumer Caution and Volume Weakness

The January sales decline was steeper when adjusted for price changes: retail sales volumes fell 1.1%, signaling genuine demand weakness. This divergence between nominal and real terms points to underlying caution among households, which are grappling with higher borrowing costs and stagnant wage growth.

The February advance estimate reinforces these concerns. While provisional, the data aligns with broader trends in durable goods, where spending often leads broader economic shifts. Investors should monitor revisions to February’s figure closely, as persistent weakness could foreshadow a broader slowdown in consumer-driven sectors like retail and hospitality.

Implications for Investors

The retail sector’s volatility underscores the need for sectoral differentiation. Furniture and home goods retailers (e.g., Home Hardware, IKEA) appear resilient, buoyed by trends toward home improvement and durable goods. Meanwhile, automotive and parts dealers (e.g., Loblaw Automotive, Toyota Canada) face headwinds from declining new vehicle sales, though used car markets may offer a partial offset.

Conclusion

The Canadian retail sector is at a crossroads. While January’s decline can partly be attributed to post-holiday normalization and policy expiration, February’s continued weakness signals deeper vulnerabilities. The 0.4% m/m decline in February, in line with consensus, suggests investors should brace for a prolonged period of caution. Key risks include further tariff impositions, stagnant wage growth, and elevated borrowing costs, which could amplify the drag on discretionary spending.

The furniture and home goods subsector’s resilience offers a glimmer of hope, but its gains are insufficient to offset broader declines. With volumes falling 1.1% in January and February’s advance estimate pointing to further softness, the data paints a picture of a consumer base still adjusting to post-pandemic realities. Investors would be wise to prioritize companies with exposure to essential goods or regional strengths, while remaining cautious on sectors tied to discretionary spending. The retail sector’s sputtering start to 2025 underscores the fragility of Canada’s economic recovery—and the challenges ahead for policymakers.