2018 ended on a very weak note for the retail sector. We expected a disappointing December based on our internal data (CBA (f) ‑0.5%). So the 0.4% fall that the ABS reported today doesn’t surprise us. The market consensus, however, was centred on a flat outcome so it was a solid miss on expectations. The AUD fell at 11.30am as a result.
For the past two years there’s been an unusual quarterly pattern to the retail figures whereby a strong quarter has been followed by a soft quarter. But that pattern was broken in Q4 2018. The soft December quarter followed a poor Q3 which means that it was a very weak second half of 2018 for the retail sector. Retail is worth about a third of total household consumption. So the early indication is that total consumer spending growth will be soft in Q4 as it was in Q3.
There is now evidence that a negative wealth effect is playing out. Despite decent employment growth, a tightening labour market and a gradual lift in wages growth, spending growth has eased. The negative wealth effect is probably best evidenced in NSW. Sydney house prices fell the most in 2018 and retail trade growth in NSW has slowed to just 1.7%/yr.
By category, household goods retailing was down by 2.8% in December and has fallen through the year. Deflating dwelling prices as well as sales volumes are having a clear negative impact on this component of the retail basket (see chart opposite). There were also falls over December on clothing (‑2.4%), other* (‑0.1%) and at department stores (‑1.1%). Spending on food (+0.5%) and eating out (+1.1%) was up.
In summary, the recent data flow relating to the consumer is concerning. Spending has slowed significantly and the latest read on consumer confidence suggests that concerns around the economic outlook for households have risen. While it is true that retail has been underperforming relative to the rest of the consumer basket for a while, it’s clear that the correction in dwelling prices is now spreading to the broader economy.
The Government’s coffers have been boosted via a surge in commodity‑related revenue. And households are handing over a greater proportion of their income each year to the Government via bracket creep. As such, the case for personal income tax case is strong, particularly in light of slowing household expenditure. Attention quickly turns to the RBA at 2.30pm today.
No, no, no. The “central scenario” is for the economy to grow above trend. The lunatic RBA said so.