Australian retail sales running on empty: Matthew Hassan

EXPERT OBSERVER

The September retail report disappointed in every respect. Monthly sales showed another weak gain, up just 0.2%, and real retail sales contracted 0.1% in the quarter to be down –0.2%yr, the first annual contraction since the early 1990s recession. The consensus forecast was for a 0.4% gain in the month and a 0.3% rise for the quarter.

The monthly profile continues to show little or no response to policy measures – interest rate cuts in June-July and tax relief from July should have added about $3bn to monthly household disposable incomes. With retail sales running at $27bn a month, even a small flow on impact to spending would quickly turn the dial. Monthly sales have instead posted lacklustre gains, flat in July, up 0.4% in August and a 0.2% gain in September. Comparing reactions to fiscal and monetary policy easings historically, the current response is at the lowest end of the range.

Quarterly real retail sales have now declined in three of the last four quarters. Importantly, the slowdown in real terms is due to a combination of moderating nominal sales growth and stronger price gains. In fact, the price side has had the larger effect – over the last year, annual growth in nominal sales has slowed by 0.7ppts but retail price inflation has surged 1.6ppts from 1.1%yr to 2.7%yr. The pick-up reflects a mix of factors including the impact of the drought on food prices and easing disinflation in some AUD-affected segments. There are also some indications that retailers have been shoring up weak margins in recent quarters.

For the September quarter, the storetype breakdown showed a very result for cafes & restaurants (–1%qtr, –0.4%yr); slippage for department stores (–0.1%qtr, +0.5%yr); flat sales for basic food (flat%qtr, –1%yr); but modest gains for clothing (+0.3%qtr, +0.9%yr) and 'other retail' (+0.3%qtr, +0.9%yr); and a surprisingly strong bounce for household goods (0.9%qtr, flat%yr) coming off back to back quarterly declines.

By state, all the eastern states recorded sales declines, WA bucking the trend with a surprisingly strong 0.9%qtr gain but coming off back to back falls. Annual spending growth shows a much clearer pattern with NSW and Vic driving the slowdown over the last year, sales in outright contraction in NSW (–1.7%yr) and contracting in per capita terms across both.

Looking by channel, online sales have posted a solid pick up since June, annual growth back above 15%yr (a double digit pace but subdued for this segment). The performance by firms size remains stark with large retailers recording steady nominal sales growth of around 4.5%yr but small retailers seeing sales falling at around 1.5-2%yr.

Overall the report suggests consumer spending remained very weak through the third quarter, pointing to clear downside risks to the wider consumption measures in the national accounts and near term forecasts for GDP growth. 

Read full article 'Australian retail sales Q3' (PDF 257kb)

MATTHEW HASSAN is a Senior Economist at Westpac