Household finances are getting squeezed and that doesn't bode well for Christmas spending

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It’s now late November, traditionally the start of a key period for Australian retailers.

As the chart below from Capital Economics shows, 20% of annual retail spending typically occurs in the final two months of the year.

Source: Capital Economics

December has accounted for 11% of annual retail sales, an average, over the past decade.

Retail sales have been pretty disappointing in recent months, falling by 0.3% in nominal terms during the September quarter, the weakest result since the global financial crisis.

The question many are now asking is whether that trend will continue during the all-important Christmas trading period, especially given the early indications suggest retail sales were soft again in October.

To Paul Dales and Kate Hickie, economists at Capital Economics, there’s reason for optimism given recent strength in Australian employment growth, but there’s still plenty of headwinds out there that suggest it’ll be another lacklustre festive season for retailers.

“Perhaps most worryingly, there hasn’t been any momentum in retail spending leading up to this Christmas period,” the pair say.

“Even the modest 0.1% quarterly rise in retail sales volumes over the third quarter was only achieved via heavy discounting. Admittedly, it is possible that households have simply been holding back for the Christmas period. But that seems unlikely given the headwinds that have been facing household finances.”

Dales and Hickie say that a combination of weak wage growth, a slowing housing market, sharply higher energy prices and high levels of household debt have all acted to keep consumer confidence levels low despite stronger labour market conditions, discouraging households to take on ever greater levels of debt.

“In other words, credit cards are unlikely to get much of a work out this Christmas,” they say, pointing to a recent question in the Westpac-MI consumer sentiment survey for November which suggests an increasing number of households expect to spend less at Christmas than they have in recent years.

“This year 54% of respondents said they would spend the same amount on gifts as they did last year, 35% said they would spend less and just 11% of respondents said they planned to spend more, which was the lowest portion since this question was included in 2009,” the duo say.

“While the historical relationship between this and actual retail spending is far from perfect, it suggests that retail spending is likely to be relatively subdued during the Christmas period.”

Westpac said the result points to flat per capita annual growth in retail sales, or an annual nominal increase of 1.6%.

Throw in the arrival of Amazon in Australia this week, something that will almost certainly intensify competition across the sector, and Dales and Hickie say the festive trading season is unlikely to be stellar.

“All told, the evidence suggests that this Christmas period will be pretty disappointing,” they say.

“While it might not be the weakest holiday period for retailers, it is unlikely to be the strongest either.”

Matthew Hassan, senior economist at Westpac, shares a similar view.

“A repeat of 2016’s ‘tepid’ Christmas spend looks likely,” he said earlier this week.

This final chart from Capital Economics shows that growth in retail sales in November and December last year was the smallest since 2012, and the third-weakest outcome in the past 16 years.

Source: Capital Economics

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