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Sales at motor vehicle and parts dealers fell 2.1 per cent as sales at new car dealers dropped 2.9 per cent and used car dealers saw a decline of 0.6 per cent.

While some of the drop can be explained by a software glitch at car dealerships that held back vehicle sales, economists said financial headwinds also contributed to the fall in retail sales.

"Spending remained soft in the second quarter as consumers struggled under the weight of elevated interest rates," Bank of Montreal economist Shelly Kaushik said in a note to investors.

In June, the Bank of Canada lowered its key interest rate to 4.75 per cent, making the move the organization's first rate cut since March 2020. In July, the bank lowered the rate again to 4.5 per cent.

Higher rates often put a damper on consumer spending because they tend to move in tandem with mortgage rates.

"Overall, the decline in sales for the quarter shows that consumers are continuing to struggle as mortgages come up for renewal and the labour market weakens," said Katherine Judge of CIBC Economics in a note to investors.

Sales were down in four of nine subsectors, with discretionary categories like sporting goods/hobby/miscellaneous falling 0.8 per cent and gas station sales edging down by 0.5 per cent on lower prices at the pump, Judge said.

She also called sales at housing-related retailers "weak" and pointed out that building material and furniture sales were down sharply from year ago levels.

"Retail sales have been soft for a prolonged period of time, and looking beyond the volatility caused by the software issue at auto dealerships shows that trend remains entrenched," she said.

However, core retail sales — which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers — rose 0.4 per cent in June.

Food and beverage retailers reported sales increased 1.2 per cent as supermarkets and other grocery retailers, except convenience retailers, gained 1.8 per cent.

In volume terms, overall retail sales increased 0.1 per cent in June.

Looking ahead, Statistics Canada said its advance estimate of retail sales for July pointed to an increase of 0.6 per cent for the month, but cautioned the figure would be revised.

"The preliminary estimates have July poised for a bounceback, though it will take time to see a more meaningful recovery amid monetary easing," Kaushik said.

This report by °µÍø½ûÇø was first published Aug. 23, 2024.