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Cheap to borrow, but no stampede to the stores

Shoppers outside the Holt Renfrew flagship store on Bloor Street in Toronto in late June. Despite some bright spots in Statscan’s May retail trade report the second quarter is still tracking negative in retail sales volumes.

Moe Doiron/The Globe and Mail

Canadian shoppers are showing some restraint lately.

Perhaps they really did take to heart Bank of Canada Governor Mark Carney's repeated warnings that household debt is the largest domestic threat to the economy.

Or maybe they just feel poorer, with home values falling, savings rates sliding and the mounting weight of global economic uncertainty.

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While Statistics Canada's retail sales figures for May released on Tuesday showed a small increase of 0.3 per cent, it didn't make up for a 0.6 per cent decline in April, and certainly doesn't indicate a reversal of the more or less stagnant sales trend seen since November, 2011.

May's modest rise was only the second so far this year, and although sales increased a healthier 0.7 per cent in volume terms, "that doesn't change the overall picture of a subdued Canadian consumer," said Krishen Rangasamy, a senior economist at National Bank.

Despite some bright spots in the retail trade report -- the first sales increase at grocery stores and supermarkets since the beginning of the year, for example -- the second quarter is still tracking negative in retail sales volumes.

Car and parts sales, an important part of the overall retail figures, are also a key indicator of the consumer spending psyche. Low interest rates should be enticing consumers to buy right now, Mr. Rangasamy said. But they didn't, at least not in May.

New car sales slipped 0.2 per cent over the month, and sales of parts, accessories and tires also fell 2.2 per cent. Auto sales are still up 9.5 per cent compared with May 2011, Statistics Canada said, but in recent months, that strength has been tapering off. May's retail results show sales at new car dealers were down for a third time in four months -- a trend that looks likely to continue.

"An absence of pent-up demand for vehicles in Canada and worries about the health of the global economic recovery will serve as headwinds for nominal motor vehicle retail sales over the next couple of months," said Sonya Gulati, a senior economist at Toronto-Dominion Bank.

The slow pace of year-on-year credit growth -- the lowest in almost 20 years, Mr. Rangasamy points out -- is an indication consumers are changing tack.

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Generalized fear about the future of the economy, combined with a relatively low rate of saving right now -- 2.9 per cent in the first quarter of 2012, down 1.4 per cent from 2011 -- means consumers are likely to sock away more of their cash in the months to come, Mr. Rangasamy said.

Which is bad news for retailers, but fits well with what the Bank of Canada is looking for to reign in consumer debt. Consumer spending grew a small amount in the first quarter at 0.2 per cent, compared to 0.7 per cent spending growth at the end of 2011.

The best outcome for the overall economy will be if Canadians reduce their debts and increase their savings gradually, Mr. Rangasamy said. Which looks to be just what's happening.

"The slow growth story continues for the consumer," he said.

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