(Bloomberg) -- Australian retail sales declined for the first time in 2022 in December, suggesting consumers are beginning to rein in spending in response to rapid inflation and rising interest rates.
The currency and bond yields slid as sales tumbled by a larger-than-forecast 3.9%, the biggest fall since August 2020, data showed Tuesday. The result came after November’s gain was revised higher to 1.7% as consumers brought forward Christmas spending to take advantage of Black Friday discounts.
“It was a shocking number,” said Diana Mousina, senior economist at AMP Capital Markets which had predicted a 0.5% drop. “Cost of living pressures are starting to bite but I still don’t think this is enough to get the Reserve Bank to hold next week.”
Retail sales have been seasonally weak in December in recent times, suggesting further evidence of slowing demand is needed before the RBA pauses tightening. Resilient consumer spending has been a key factor in its confidence that the economy can withstand higher rates, with a quarter percentage-point hike likely next week.
Money markets imply a peak rate of 3.7% this year while economists expect the central bank will stop at 3.6%, from 3.1% now.
The Australian dollar edged lower after the report as investors weighed the data’s impact on the prospects of further rate hikes, and three-year government bond yields also declined.
Escalating consumer prices and higher borrowing costs have battered consumer sentiment while the re-emergence of overseas travel is threatening to shift spending offshore. Bloomberg Economics expects further weakness into 2023 as the full impact of rate hikes passes through to household budgets.
What Bloomberg Economics Says...
“Looking ahead, retailers face several headwinds in 2023. The impact of 300 basis points of rate hikes in 2022 is flowing through and weakening demand. Reopened borders, meantime, are allowing Australian travelers to take their tourism spending offshore”
— James McIntyre, economist
To read the full note, click here.
Today’s data will be important for policymakers who have repeatedly stressed that a key risk to the outlook is the response of households to higher rates.
Despite December’s drop, retail sales jumped 7.5% for the whole of 2022.
Household spending accounts for roughly 60% of gross domestic product. The RBA is prepared for a slowdown, with its own forecasts showing consumption growth slowing to 1.3% by end-2023.
Today’s retail sales figures showed turnover fell in industries that had been boosted by November’s Black Friday sales.
- Department stores had the largest fall, down 14.3%, followed by clothing, footwear and personal accessory retailing dropping 13.1% and household goods declining 7.8%
- Food was the only industry to record a rise, up 0.3%
- Quarterly retail sales volumes will be released on Monday
The data was released at the same time as figures from the RBA which showed private sector credit grew less than expected in December.
Economists at Australia & New Zealand Banking Group Ltd. forecast annual credit growth to halve this year, “reflecting a decline in risk appetite as a result of weaker expectations of economic growth, inflation and rising interest rates.”
--With assistance from Tomoko Sato and Yoshihiro Sato.
(Adds economists’ comments.)
©2023 Bloomberg L.P.
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