Retail Sales Fall Short Of Expectations

Retail Sales Fall Short Of Expectations

·        Retail sales volumes rose 0.8%q/q in 4Q
·        Retail prices rose 1.0%q/q in 4Q
·        4Q GDP growth forecast downgraded mildly

Australia’s retail sales volumes grew 0.8%q/q in 4Q (J.P.Morgan 1.1%, consensus 1.0%), marking the largest rise in 2008, but falling short of expectations. The weaker than expected result prompted a mild downward revision to our 4Q GDP growth forecast from -0.5% to -0.6%, the first contraction in the current recession. We forecast another contraction in GDP in 1Q09.

The increase in sales volumes can be attributed to significant discounting among retailers, alongside significant cuts to the cash rate, falling petrol prices, and the one-off bonus payments delivered to low- and middle-income earners in early December. The largest rise is sales volumes was in ‘other retailing’ (+3.3%), which includes newspaper and stationary sales, recreational goods retailing, and sales of pharmaceuticals, among other items. Food retailing and household goods retailing also posted significant gains, both rising 0.8%. Sales volumes fell in clothing and soft good retailing (-0.4%) and cafés, restaurants and take away meals (-1.5%).

The outlook for consumers remains bleak. Households are facing considerable headwinds owing to the massive wealth destruction underway in the highly leveraged household sector. In our view, the largest drag on consumption in the foreseeable future will be the deterioration in labour market conditions, with our forecast calling for the unemployment rate to double to 9% by the end of 2010.

Cushioning the blow is the significant monetary and fiscal policy easing that has, and will, be delivered. The RBA has delivered 400bp of policy easing since early September, the most aggressive series of official rate cuts since the 1990-91 recession. We forecast another 50bp rate cut is March. Also, the Government plans to deliver A$12.7 billion in another round of one-off cash payments in March. This, however, like the previous payments, will have only a temporary impact on spending, although there probably will be a spike in sales volumes in 1Q09.

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