Australia just received another worrying reading on the fragility of household finances

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Australian retail sales have been terrible in recent months.

According to the Australian Bureau of Statistics (ABS), they fell in both July and August, and came in flat in September, presenting a worrying indication on the health of household finances.

Unfortunately, if this alternate retail sales indicator from the National Australia Bank (NAB) is correct, it looks like that weakness continued in October.

The bank’s Cashless Retail Sales Index, a measures of spending patterns from its customers using debit and credit cards, BPAY, and Paypal, grew by just 0.2% last month, leaving the increase on a year earlier at 6.5%, the weakest level in the three-year history of the survey.

Source: NAB

As Alan Oster, Chief Economist at the NAB points out, this does not bode well for Australia’s official retail sales report that will be released in two week’s time.

“Based on movements in NAB’s data and our data mapping techniques, ABS retail trade is expected to rise by 0.1% in October, a disappointing outcome given the flat result in September and decline of 0.5% in August,” he says.

A disappointing outcome indeed, and one that will do little dispel growing concerns about the household sector, the largest and most important part of the Australian economy.

Oster says the recent weakness is unusual, pointing out that while wage growth remains incredibly weak, this has been offset by stronger employment growth over the past year.

“The slowdown in retail spending is particularly disappointing given the strength of employment growth so far this year, with almost 300,000 jobs added and the unemployment rate falling to 5.4%,” he says.

“While wages growth may be low by historical standards, the magnitude of the lift in employment would ordinarily be supporting consumer spending to a larger degree, suggesting other concerns such as high debt levels are also leading to household caution.”

He also says that a shift in household spending patterns — be it voluntary or involuntary — may explain the recent anomaly.

“It is also the case that retail is underperforming consumer spending more broadly,” he says.

“That is, households are devoting less to spending on goods and more to spending on services, either for voluntary reasons such as preference shifts or involuntary reasons such as higher prices for essentials such as utilities.

“These trends, together with intense competitive pressures, are culminating in a challenging landscape for Australian retailers.”

While the shift towards spending on experiences away from goods is part of an ongoing trend, the recent weakness in retail sales follows large increases in gas, electricity and petrol prices, along with higher mortgage rates for some borrowers.

Combined with ongoing weak wage growth, this could be crimping spending in discretionary areas.

Oster says that a slowdown in housing construction may be also contributing to the weakness, noting that spending through the NAB network on household goods grew by just 2.5% over the year, led by outright declines in spending on hardware and garden supplies.

“There has, been a pronounced slowing in household goods retailing in recent months, particularly in the hardware and garden category, which may be related to the housing construction cycle which looks to have passed its peak” he says.

While there were some improvements in other areas such as department stores and at cafes, restaurants and takeaway food outlets over the same period, the broader slowdown provides yet another worrying reading on the current fragility of household finances.

Although this index only captures cashless spending by the NAB’s customers base, given the sheer volume of transactions it measures, Oster says it’s likely reflective of broader spending patterns across the economy.

“[The] index is reasonably assumed to be representative of aggregate non-cash retail sales in Australia given its large sample size,” he says, noting that it captures around two million transactions per day.

And while it failed to predict the weakness seen in Australia’s September retail sales report, it did correctly foresee the plunge in sales reported in August.

That alone suggests its worthwhile paying attention to.

Australia’s October retail sales report will be released on Tuesday, December 5.

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