Australian retail sales unexpectedly fell in June, suggesting consumers are hunkering down in response to the Reserve Bank’s 12 interest-rate increases in 15 months.
Sales declined 0.8% from a month earlier, compared with estimates for a flat reading, and erased all of their gains in May, Australian Bureau of Statistics data showed Friday. The weakness was driven by department stores and clothing and footwear, the bureau said.
The result bolsters the case for the RBA to stand pat on Tuesday for a second-straight meeting after inflation data two days ago showed a cooling of prices. Money markets trimmed bets for a final rate hike this year and the policy-sensitive three-year government bond yield pared gains.
“The weakening consumption story highlighted by today’s retail sales report means the risk is the RBA opts to pause again,” said Su-Lin Ong, chief economist for Australia at the Royal Bank of Canada, who pushed back her forecast final 25 basis-point rate increase “ to sit possibly in Q4.”
The RBA left the cash rate at 4.1% earlier this month to assess the impact of its tightening cycle that began in May 2022, while keeping the door ajar to further tightening. Retail sales are an important factor in rate decisions given that consumption accounts for roughly 60% of gross domestic product.
Swaps traders now see an 86% chance for a hike this year, after fully pricing in one for December ahead of today’s report. For the Aug. 1 meeting, markets see a mere 23% chance of a rate rise.
“The loss of momentum in consumer spending will weigh heavily on upcoming RBA decisions,” said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia. “After the promising CPI print earlier this week, we expect rates will be on hold in August.”
Friday’s report chimes with downbeat consumer sentiment as households are being squeezed between higher rates and still-elevated inflation.
In a further headwind, a large number of mortgages that were fixed for three years at record low rates during the pandemic are being switched to higher floating rates, with the majority due in September.
Today’s retail report showed:
- Department stores dropped 5%, the largest fall, followed by other retailing, down 2.2%, and clothing, footwear and personal accessory retailing also fell 2.2%
- Food-related spending was mixed, with a drop in cafes, restaurants and takeaway food services, down 0.3%, and a rise in food retailing, up 0.1%
- Consumers are responding to food-price increases by changing to cheaper brands or by simply buying less, according to the bureau
- Second-quarter sales-volume data will be released Aug. 3
Bloomberg Economics expects weakness through 2023 as the full impact of policy tightening flows through to household budgets. Economist James McIntyre said the outlook for retail sales remains challenging despite strong employment, rising wages, increasing population growth and house prices climbing again.
--With assistance from Garfield Reynolds and Tomoko Sato.
(Adds comment from economist in third paragraph, market reaction in fifth.)