JP Morgan: Australian Retail Sales in September

Australia’s retail sales fell unexpectedly in September, slipping 0.2%m/m (J.P. Morgan +0.3%, consensus +0.5%), mainly owing to a pull-back in the main categories of discretionary spending. The post-Government cash-payments period always was going to be a key test for households, particularly as it now is being coupled with the RBA’s removal of monetary policy stimulus. Until now, consumers have proved unexpectedly resilient, but today’s retail numbers suggest the fiscal-fuelled retail spending spree has ended.

In the absence of further fiscal stimulus targeted at households, consumers are facing considerable headwinds, the strongest of these being rising interest rates. The RBA hiked the cash rate 25bp in both October and November. With our forecast calling for another 25bp rate hike in December, consumer spending probably will be soft throughout the final quarter.

(For full graphs please visit the following link: http://img.scoop.co.nz/media/pdfs/0911/JPMorgangraphs.doc)

The quarterly retail volumes numbers are important for our 3Q GDP forecast, with retail sales accounting for a quarter of GDP. The data today showed retail sales volumes fell 0.4%q/q in 3Q, after a 1.9% gain in 2Q. In the monthly data, in addition to the weak September result, there was a small downward revision to the previously published outcome for August (now +0.7%, from +0.9% previously).

Our forecast is for another quarter point rate hike in December, although if the other consumer-related data also print on the weaker side of expectations, the risk of the RBA pausing will rise considerably. Next week’s employment data also are important. The Australian Retailers Association (ARA) labeled yesterday’s rate hike from the RBA as a “handbrake” on the economic recovery, suggesting it would frighten consumers into “financial hiding.”

The largest falls in retail sales in the month of September were recorded at department sales (-2.9%m/m). Significant falls were also recorded in sales of household goods (-0.7%) and clothing (-0.8%); the latter largely attributed to continued discounting by retailers, and the stronger AUD, which has reduced the price of imported goods. Sales of other goods rose 0.8%m/m, sales at cafes and restaurants rose 1.0%, and the value of food sales was flat. Ex-food retailing was down 0.3%m/m, indicating the underlying weakness in consumer spending in September.

ENDS

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