Should we expect continued softness in retail sales?

Unsurprisingly, consumer spending dominates all other categories and contributors to economic growth in a consumption-based economy such as Australia's. Australia's private consumption accounted for 49.8 per cent of nominal gross domestic product (GDP) in the June 2023 quarter. Australia's private consumption contribution to the Nominal GDP ratio, which is updated quarterly, from Sep 1959 to Jun 2023, averaged a 56.2 per cent share.

Therefore, monitoring changes in consumption is worthwhile to the extent it informs a broader picture of economic strength or weakness and, in turn, the path of interest rates or corporate profits.

In the most recent update, retail sales in October experienced a decline, falling by 0.2 per cent from the previous month and weaker than economists’ and analysts’ consensus expectations. Notably, this downturn followed strong growth in the prior month. From a yearly perspective, the annual growth rate has decreased to 1.2 per cent.

This decline in retail sales was spread broadly across all categories, apart from food sales which saw a modest increase of 0.5 per cent for the month. For the month of October, household goods were down 0.6 per cent, apparel was 1.0 per cent lower, department stores experienced a 0.6 per cent decline, other retailing was 0.4 per cent weaker, and cafés and restaurants were also 0.4 per cent weaker.

Notably, household goods remained the weakest sector in annual terms, down 4.7 per cent year-on-year, and apparel was also weaker over the year by 0.7 per cent. The standout on an annual basis is cafés and restaurants, which is up 4.6 per cent year-on-year.

Regionally, New South Wales and Victoria experienced the most significant drops in retail sales in October, down 0.5 per cent and 0.8 per cent, respectively.

These figures suggest that consumer spending remains subdued, especially when considering factors like population and price growth. However, part of the decline in October may be attributed to consumers pausing their spending in anticipation of November’s Black Friday sales, which typically offer significant discounts.

That seems to be the case in the U.S., where statistics just released by Adobe Analytics reveal Americans set a new Cyber Monday spending record, ringing up U.S.$12.4 billion worth of online purchases.

U.S. online spending during the five days from Thanksgiving to Cyber Monday was up 7.8 per cent year-on-year, totalling U.S.$38 billion, suggesting increasingly muted consumers had been waiting for the traditional Thanksgiving deals season.

Currently, analysts and economists expect continued softness in retail sales, particularly in discretionary spending. However, a broader economic slowdown might still be necessary to convince the Reserve Bank of Australia (RBA) that its policies are sufficiently restrictive to address inflation concerns.