Concern about a looming retail sales slump in Australia isn’t going away

  • Australian retail sales rose by 0.4% in November last year, the largest gain since April 2017.
  • Despite being stronger than expected, concerns about weak spending either side of Christmas remain elevated.
  • Many analysts believe Black Friday and Cyber Monday sales brought forward spending usually seen in December into November, creating the potential for weakness given similar outcomes have been observed in prior years.
  • Ahead of the official December retail sales report in early February, the next NAB cashless retail sales index could provide a guide as to how bad — or not — spending was during the month. It will be released on January 23.

Australian retail sales grew by 0.4% in November after seasonal adjustments, the fastest percentage increase since April 2017.

On face value it was a reasonable result, helping to calm fears in some circles about a potential housing-led spending slowdown.

However, while some saw the result as pretty good, Credit Suisse’s Australian equities team thought it was anything but, warning that when the impact of Black Friday and Cyber Monday sales were taken into consideration, the result was actually “weak”.

“With Black Friday sales events lasting a week in some instances, the event gained increasing significance in Australian in 2018,” Credit Suisse says.

“The November data is even weaker when inadequate seasonal adjustment is considered.

“In 2016 and 2017, December growth rates decelerated sharply compared with November, reflecting the rapid growth of the Black Friday and Cyber Monday sales events.

“The ABS seasonal adjustment is yet to fully capture those events.”

As was the case in 2017, Credit Suisse thinks a similar scenario is likely to be seen again when December’s retail sales report is released.

“When the likely pull forward of retail sales into November 2018, supported by the ABS reporting an increasing share of online in November 2018 retail sales is considered, the momentum into December is appearing to be extremely weak,” it says.

Analysts at the bank suggest discretionary stores are “likely taking the brunt of slowing consumer spending”. They’re not alone on that front.

According to separate analysis from Morgan Stanley’s equity research team, Christmas was likely a soft trading period for Australia’s non-food retailers.

“Falling house prices, a greater focus on Black Friday driving discounting, and weaker equity markets all look to have held the Australian consumer back this Christmas,” Morgan Stanley says.

“Retail foot traffic — per ShopperTrak — decelerated badly during December. This is partly explainable by consumers browsing online then transacting instore, increasing conversion, but still looks soft.

“New vehicle sales in December fell 14.9%, the largest drop since the Global Financial Crisis. Our channel checks indicate that December trading deteriorated compared with October and November. We cite the soft macro climate.”

Along with a steep decline in the value of credit card transactions at retailers processed through the Commonwealth Bank’s network between November through to early January, it’s easy to see why concern about a pronounced spending slowdown in December — despite what was seen in November — has failed to go away.

While the official retail sales report from the ABS won’t be released until early February, coincidentally on the same day the RBA will hand down its first monetary policy decision of the year, Morgan Stanley says it will be paying particularly close attention to the next Cashless Retail Sales Index released by the National Australia Bank (NAB) on January 23 for an indication as to how bad — or not — the official December report will be.

In November, it correctly predicted that sales would increase by 0.4% in the ABS data.

“While the November ABS data was not as soft as market participants feared, it’s probably still not enough to offset concerns of a soft Q4 outcome for consumer spending given reports of a weak December period and given it’s likely a fair chunk of November’s upside surprise reflected consumers bringing forward their Christmas shopping,” said Kaixin Owyong, Economist at the NAB.

“The data provided a reminder that changes in consumer behaviour are running ahead of the seasonal factors, an effect likely to work in the reverse direction in the December data.”

That is, the strength in November could easily be reversed in December, as Credit Suisse has warned.

The next few weeks will be more than interesting, especially with markets adopting the view that the next move in the RBA cash rate is likely to be down, rather than up.