The dire signals on the health of Australia's vast retail sector are growing

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  • Australia’s retail sector is the second-largest employer in the country behind healthcare.
  • In December, retailers surveyed by the NAB indicated that conditions weakened sharply, falling to multi-year lows.
  • Recent indicators on spending and household confidence point to very weak conditions across the sector either side of Christmas.
  • Broader household consumption — which retail sales accounts for around 25% — weakened sharply in the September quarter last year. The early indicators suggest that may have continued in late 2018.

Australia’s retail sector, with around 1.3 million employees, is the second-largest employer in Australia, behind only healthcare at about 1.7 million.

Retail sales are also a significant part of the Australian economy, accounting for just under a third of household consumption, the largest component in GDP at over 50%.

No matter which way you look at it, the sector is very important to the broader Australian economy.

That makes the chart below all the more concerning.

NAB

From the latest National Australia Bank (NAB) Business Confidence Survey for December, it shows that conditions across Australia’s retail sector tanked during the month, falling to fresh multi-year lows.

In particular, the readings on trading conditions and profitability slumped, driven by what the NAB said was “particularly weak” spending in discretionary areas.

“The business survey provides us with another perspective on weakness in the retail sector following the release of consumer side indicators over the past month,” said Alan Oster, Chief Economist at the NAB.

“By sub-component, personal and household goods, as well as car retailing, suggest that discretionary retail is particularly weak.”

The results also fit with a variety of other indicators that suggest retail spending in the pre and post-Christmas period were fairly dire.

According to credit card transactions processed through the Commonwealth Bank’s network, spending on retail goods from the start of November to the early part of January slumped 3.7% compared to the same period a year earlier.

And while Australian retail sales, as measured by the ABS, grew by 0.4% in November after seasonal adjustments, the NAB’s Cashless Retail Sales Index — an alternate measure on retail spending — suggests that increase may be reversed in December, predicting a decline of 0.3%.

The latest Westpac-MI Consumer Sentiment report also suggests sentiment levels among households were a little gloomy in January with its closely-watched index falling to the lowest level since late 2017.

All three measures suggest that retail spending was pretty weak late last year and in early 2019, perhaps dragged lower by continued, and accelerated, home price declines in Sydney and Melbourne over the same period, offsetting the impact of continued strength in labour market conditions.

We’ll get official data from the ABS on retail trade in December in early February, but the early signs for this key part of the Australian economy are not looking all that great.

Should that report mirror the deterioration seen in other indicators, it will only increase the odds — already high and growing — that the next move in official interest rates from the RBA may not be higher but lower.

The RBA’s first monetary policy decision of the year arrives on February 5, coincidentally the same day Australia’s December retail sales report will be released.

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