Retail sales in Canada fell in June, widely missing expectations of a small gain as increasingly cautious shoppers pulled back on a number of fronts and overnight trips to the U.S. hit a record high as higher duty-free exemptions kicked in.

Statistics Canada reported Wednesday that seasonally adjusted retail sales declined 0.4 per cent to $38.7 billion in June from the month earlier, more than offsetting a gain in May and frustrating economists who had expected a 0.1 per cent increase.

The biggest declines were felt by retailers who sell general merchandise, gasoline, building materials and garden equipment.

'Retail sales will have difficulty gathering much momentum '—BMO economist Benjamin Reitzes

"The surprise drop in June sales was broad-based, suggesting households are becoming a little more cautious, though cross-border shopping may have played a role as well," BMO Capital Markets senior economist Benjamin Reitzes said in a commentary.

"Indeed, overnight visitors to the U.S. travelling by car hit a two-decade high in the month," Reitzes noted.

Canadians made a record 1.9 million overnight trips to the U.S. in June, and most overnight travel was by car, with Canadians taking more than 1.2 million trips — a 10 per cent increase month over month.

As of June 1, cross-border shoppers on an overnight trip are allowed to declare $200 worth of purchased goods. Before they were only allowed $50. For people on a jaunt of between two and seven days, the limit has doubled to $800 from $400.

Meanwhile, Reitzes said the "constant haranguing" by policy-makers urging households to borrow more cautiously, along with slowing job growth, also likely prompted some restraint.

"Given that employment contracted in July and likely won't improve significantly over the coming months, and with the added drain of cross-border shopping, retail sales will have difficulty gathering much momentum through the second half of the year," Reitzes predicted.

The Retail Council of Canada has said increasing duty exemptions on goods bought in the U.S. would negatively impact Canadian retailers, especially those in border communities, by luring more shoppers stateside.

Of the 11 subsectors that Statistics Canada tracks, seven of them reported lower sales — representing 64 per cent of the country's retail trade.

Statistics Canada said that receipts at general merchandise stores fell by 1.05 per cent, with store closures contributing to lower sales at department stores.

Gasoline station sales decreased 1.3 per cent, reflecting lower prices at the pump — the sixth decrease in eight months.

Building material and garden equipment and supplies dealers reported a 2.1 per cent sales decline, perhaps reflecting early spring sales in February and March, Statistics Canada said.

Sales at motor vehicle and parts dealers decreased 0.4 per cent.

Receipts at food and beverage stores increased 0.5 per cent overall, with supermarkets and other grocery stores (up 1.0 per cent) accounting for most of the increase.

Sales at electronics and appliance stores rose 1.1 per cent in June, following declines in April and May.

Retail sales fell in six provinces in June with Alberta, which posted a 1.3 per cent decline, reporting the biggest drop decline in dollar terms after posting the largest increase in May. Lower sales of new motor vehicles were the main reason for the June decrease.

Sales in British Columbia declined one per cent on the heels of relatively flat sales the previous three months.

Ontario retailers registered a 0.3 per cent drop, largely offsetting May's gain, while Quebec reported a 0.7 per cent increase after three consecutive monthly declines.

Saskatchewan and Manitoba both posted 0.1 per cent increases, while sales in New Brunswick were flat.

Elsewhere in Atlantic Canada sales were down — off a sharp 3.4 per cent Nova Scotia and down 1.4 per cent in Newfoundland and Labrador and 1.6 per cent in Prince Edward Island.

Avery Shenfeld, chief economist at CIBC World Markets, said that beyond the weaker than expect reading for June, figures for May were also revised down to plus 0.2 per cent.

"The only solace was that the numbers for June looked better in real terms, with volumes declining only 0.1 per cent," he said.

Shenfeld described recent reports as bullish for fixed income and negative for the Canadian dollar as weak retail and wholesale results (down 0.1 per cent for the month) now point to a gain in June gross domestic product of no better than 0.1 per cent.

"Canada has yet to see the improved tone to economic data that is showing up stateside," he said.

With files from CBC News