By Promit Mukherjee

OTTAWA (Reuters) -Canada’s retail sales shrank faster than anticipated in January as car purchases and supermarket and grocery sales all fell, data showed on Friday.

Sales dropped 0.6% on a monthly basis to C$69.4 billion ($48.31 billion), after rising by an upwardly revised 2.6% in December, Statistics Canada said. In volume terms, sales were down 1.1%, a decline last seen two years ago.

The drop in sales is mostly due to normalization of consumer spending after the December holiday season, when sales are usually high. December’s purchases were also bumped up by a sales tax break that ended in mid-February, economists noted.

Analysts polled by Reuters had forecast retail sales to drop by 0.4% month-on-month.

Excluding automotive parts and dealers, sales were predicted to fall by 0.2%, although the data showed that in fact they rose 0.2%.

Retail sales are considered an early indicator of gross domestic product growth and contribute almost 40% to total consumer spending, which was partly responsible for keeping Canada’s economy growing in the third and fourth quarters of 2024.

However, as Canadian businesses and consumers deal with a wave of tariffs from U.S. President Donald Trump’s administration, the Bank of Canada has predicted that consumer spending will drop and GDP will be hit.

The direct impact of tariffs will probably show in March’s sales figures, but the impact on consumer spending due to uncertainty around tariffs could be reflected as soon as February.

“The tax holiday will continue to add some noise to the data through March – just in time for tariff uncertainty to hit consumer sentiment,” Shelly Kaushik, senior economist at BMO Capital Markets, wrote in a note.

Numbers for February collected from a flash survey of half of the respondents normally polled for full monthly data indicated that sales likely dropped by 0.4%, according to Statscan.

January’s data showed declines in three out of nine subsectors, with the car and parts subsector registering a drop of 2.6%, followed by a 2.5% decline in purchases across food and beverage retailers.

The biggest bump to sales came from gasoline stations and fuel vendors, whose revenues rose by 3.2%, Statscan said.

($1 = 1.4366 Canadian dollars)

(Reporting by Promit Mukherjee and Dale Smith; Editing by Kevin Liffey and Mark Heinrich)

---