Eric Shackleton, THE CANADIAN PRESS

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TORONTO - The broader Canadian economy appears to be teetering on the edge as consumers direct more of their spending towards energy, food and transport - an indication that economic activity is shifting into lower gear.

Statistics Canada reported Wednesday that retail sales as a whole rose by 0.5 per cent in June, largely on the strength of a 4.2 per cent increase in the price of gasoline, but economists said the headline numbers obscurred the impact of higher energy prices..

Once price variations for all goods and services sold by retailers are taken into account, Canadian retail sales in constant dollars in June actually decreased by 0.4 per cent.

The retail sales report is just one more indication "that the Canadian economy is cooling," said Charmaine Buskas, an economist at TD Bank.

"Despite the strong headline number for retail sales, if you look at it in real terms stripping out the price effects, retail sales were actually down," Buskas said.

The only reason retailers are doing so well, she said, is because they are having to charge higher prices, and consumers are paying those prices.

Bank of Montreal economist Doug Porter said the sales report "is consistent with an economy that's just struggling to turn out growth of any variety."

"It now looks like GDP (gross domestic product) managed to eke out a tiny advance in the second quarter," Porter said. "The underlying story in this retail sales report is consistent with that."

Statistics Canada also reported Wednesday that the composite index of leading indicators was unchanged in July, although two of 10 components fell. The index is a measure of where the economy is likely headed six months to nine months from now.

TD Bank said in a study released Tuesday that economic growth looks likely to come in at about 0.8 per cent on an annualized basis in the second quarter, after contracting by 0.3 per cent during the first quarter.

The "take-away" is that "there is a little bit of slowing occurring in the Canadian economy, and that squares with what we've seen with a lot of the other economic data out recently" such as labour and house price figures, Buskas said.

Statistics Canada previously reported soft job numbers for July, losing 55,000 jobs during the month. The most recent trade numbers, however, showed a solid gain in exports and manufacturing shipments, and wholesale sale numbers for June were also solid.

According to Statistics Canada, wholesale sales were up two per cent to $45.2 billion in June, the fifth increase in six months. Also, the trade surplus with the world expanded to $5.8 billion in June from $5.2 billion in May.

Last week, the Canadian Real Estate Association reported that the average existing home price fell by 3.6 per cent in July over the same month last year as prices in Western Canada's hot housing market softened.

Buskas said that "what we saw through the second quarter is that exports and manufacturing really pulled up the slack in the economy."

At TD Bank, she said, "we're expecting that to be really the driver of any growth that we see going forward."

On Wednesday, Statistics Canada reported that retail sales were up in six of eight sectors, with the strongest increases in clothing-and-accessories and food-and-beverage stores.

Turning to the composite leading index, Statistics Canada said declines in housing and the average work week in manufacturing were large enough to offset small increases in the six components that rose. Two of the 10 components were unchanged.

The housing index decreased by 2.9 per cent, its largest decline since June 2002, largely due to a drop in housing starts. Manufacturing indicators were mixed with new orders rebounding 1.3 per cent from a sharp decline, while the average workweek in manufacturing fell 0.5 per cent.

Looking ahead, said Porter, "the leading indicators for the second month in a row were flat."

The index is "signalling modest growth at best in the second half of the year," he said.

Said Buskas, "we'll probably see the economy over the next couple of months treading water," with no turnaround in the offing until at least 2009.

The economy will continue to soften "just based on the fact that one of the key sources of support for the Canadian economy - the U.S. demand for our goods and services - is going to shrink further."

The Canadian economy is being affected by the weakness in the United States, where the subprime mortgage fiasco has hit the housing market hard leading to thousands of layoffs, and cooling domestic demand in Canada.

Canada's export-sensitive forestry and automotive manufacturing sectors have been savaged by the U.S. downturn, as well as losing their cost advantage because of the strong loonie, causing plants and mills to close.

"Until the U.S. starts to have a convincing turnaround," said Buskas, "Canada is probably going to at the very least tread water if not contract."