Australia: Retail sales continue to weaken - ANZ

Jo Masters, Senior Economist at ANZ, explains that Australian retail sales disappointed in both March and Q1, with soft volumes and weak retail inflation as trading conditions remain difficult given the combination of strong competition, weak pricing power and low household income growth.

Key Quotes

“The Q1 data sets up a weak base for Q1 GDP (to be released on 7 June), particularly as net exports are expected to detract from growth. The recent speech by RBA Governor Lowe highlighted the Bank’s growing concern about the vulnerability of the economy to shocks to the household sector given the high level of indebtedness. In line with this concern we have argued in earlier research that the household saving rate is likely to have risen in Q1. The soft retail sales data is consistent with this.”

“Retail sales fell for the second consecutive month, with nominal sales falling 0.1% in March, from a downwardly revised February. Sales are now just 2.1% higher than a year ago, the weakest annual growth rate since June 2013.”

“Sales were particularly weak in Queensland (-1.3% m/m). Sales in NSW were soft (+0.1% m/m), while in Victoria sales bounced back from February’s weakness.”

“Sales of food, household goods, department stores and cafés, restaurants & takeaway all fell in March, while clothing sales were up just 0.4% after a sharp fall in February. The weakness in sales of household goods is surprising given ongoing strong house price growth. Sales fell at both small and large stores in March.”

“Real quarterly retail sales were also below consensus expectations, rising just 0.1% q/q (from a downwardly revised 0.7% q/q in Q4 2016). This sets up a weak base for Q1 GDP, particularly with net exports expected to detract from growth. The RBA is clearly watching consumption closely, not only because it accounts for around 60% of the economy but because RBA Governor Lowe warned last week of the “possibility of future sharp cuts in household spending because of stretched balance sheets”. With retail weakening, an acceleration in the pick-up in non-mining business investment would, as the RBA noted in its post meeting statement this month, “be welcome”.”

“Retail prices rose by just 0.1% q/q and 1.5% y/y in Q1, again highlighting the price pressures in the retail sector. Household goods and department store prices fell in Q1, while clothing and soft good prices were up just 0.2%.”