Australian retail sales tread water: Westpac's Matthew Hassan

EXPERT OBSERVATION

The May retail update showed sales edging up 0.1% in the month but essentially flat over the April-May period.

This was a touch below the consensus forecast of a 0.2% gain but in line with Westpac's view.

Annual growth slowed to 2.4% over the year, the slowest pace since the start of 2018 and well below the long run average of 4% over the year.

As noted last month, the timing of public holidays may have affected sales over April-May period.

Aside from that our main area of interest is around the sub-category and state detail and the extent to which these show wealth effect drags from the Sydney and Melbourne housing corrections.

The evidence this month is mixed: household goods and NSW remain notable weak spots for sales but the deterioration in these segments remains moderate and sales remain firm across other discretionary categories and in Vic, with a notable firming in the resource states.

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By category, the main source of weakness in May was basic food retail (–0.3% in the month). This category accounts for 40% of total retail.

Food price moves have been a significant driver of fluctuations – the latest dip may be a sign that these are easing. Sales ex basic food rose 0.4%mth.

Across the other categories, household goods recorded a 0.4% fall in the month following a 0.9% decline in April with weakness pronounced in the housing-related 'furniture & floor coverings' sub-category (worth about 25% of the wider category).

That suggests wealth effects are dragging on 'big ticket' discretionary spending (a view supported by recent weakness in vehicle sales).

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However, the picture is more mixed across 'small ticket' discretionary categories, sales slipping for clothing (–0.2%mth) and department stores (–0.4%mth) but rising for cafes & restaurants (+0.7%mth) and 'other retail' (+0.6%mth).

The state patterns were also mixed. Sales continue to slow abruptly in NSW, down 0.1% in the month but with annual growth down to a very weak 0.5% over the year.

Vic is holding up much better with a 0.6% gain in the month and annual growth above 4% over the year. The two 'mining states' recorded dips in May but continue to see annual growth lift, running at a surprisingly strong 4.7%yr pace in the case of Qld.

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Looking by channel, online sales continue to moderate from the big surge in 2018, annual growth slipping below that via 'traditional' channels for the first time since the ABS started collecting monthly online sales data in 2013.

The breakdown by retailer size shows small retailers bearing the brunt of the 2019 slowdown. That said, while sales growth has held up better for larger retailers (running at 4% over the year) it is low by historical standards.

Overall the May update is bleak but not bleaker than expected. Retail sales are treading water in nominal terms rather than contracting.

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As such the wash up for the June quarter volumes that feed into national accounts estimates of consumer spending will depend heavily on what has been happening on the price side. We suspect retail price inflation has slowed significantly from the food price driven gains over the last two quarters.

The June quarter CPI update due at the end of the month will be an important pointer on this question and the extent to which growth in consumer demand is slowing.

MATTHEW HASSAN is a Senior Economist for Westpac.