OTTAWA - The federal government can take at least a little of the credit for the return of the Canadian shopper that is helping lead the country out of recession.

New retail sales for May rose a surprisingly robust 1.2 per cent, Statistics Canada reported Wednesday, in yet another clear signal that the economic free fall of the winter months is braking quickly.

The eye-catching detail in the report was the one per cent hike in the building and outdoor home-supplies stores sector - double the previous month's rate - and a 1.1 per cent gain in home centre and hardware store sales.

CIBC World Markets economist Krishen Rangasamy said Ottawa's $3-billion home renovation program, which pays back up to $1,350.

"That definitely is having an effect," he said. "Since this home renovation tax relief became available, you've seen sales in that particular category increase in all months except for one (March)."

In the June economic update, Ottawa reported Revenue Canada had received more than 700,000 inquiries from Canadians about the tax credit.

More generally, the sales report points to an economy that is slowing coming out of one of the worst downturns since the Second World War.

Economists have recently tracked the relative resiliency of the Canadian domestic economy - as opposed to the carnage in the export sector and manufacturing - that has helped keep Canada from falling as sharply or deeply as the U.S.

A recent Bank of Montreal report credited the difference in the two economies to the relative low level of job losses that have occurred in Canada compared with the U.S. Using comparable criteria, the paper argues that Canada's jobless rate of 8.6 per cent is actually 2.4 points better than that in America.

With Canadian banks relatively healthy and better household solvency rates, Canadian consumers have been consistently outpacing their U.S. counterparts in purchases of homes, autos and other goods for most of the past year.

"It takes a willingness of borrowers to borrow and lenders to lend to turn improved affordability of big-ticket items into drivers of consumer spending and economic recovery, which is why Canada is racing ahead of the United States," wrote economist Michael Gregory.

The Bank of Canada is also buying into the story-line that the Canadian economy is poised for a rebound, forecasting on Tuesday that output will grow by a full three per cent in 2010.

Although the May retail numbers are ancient history in terms of what is occurring in the economy now, economists said it will have the effect of moderating the expected gross domestic product contraction during the month to an expected 0.5 per cent.

TD Bank economist Pascal Gauthier agreed the data is another indicator of recovery, but cautioned retail sales remain 5.8 per cent lower than peak levels of last September.

"Recovery indeed, but the climb back up to pre-recession levels can reasonably be expected to be relatively long and gradual," he said.

Still, economists noted there were no weaknesses in the report. Not only was the value of sales up to $34 billion, but the volume of sales also increased by 0.7 per cent.

Statistics Canada said seven of eight sectors reported growth, led by a 2.4 per cent increase in the automotive sector and a 3.4 per cent hike in sales at new-car dealerships. The exception was in clothing and accessories stores.

The gains spread coast to coast, with the exception of Prince Edward Island.

"The big picture is that optimism is coming back," said CIBC's Rangasamy. "Consumers have to feel optimistic before starting to shop again and we've seen a come back, not only in this report, but in housing sales as well."

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