Australian retail sales have been terrible recently, creating renewed concern over the health of household budgets.
In August, sales tumbled by 0.6%, the steepest monthly decline since March 2013. Sales contracted in all Australian states and territories, and across most categories during the month.
Doubling down on the bad news, sales in July were also revised lower to show a decline of 0.2%.
The back-to-back falls saw sales growth slow to just 2.13% over the year, the weakest increase since July 2013.
Aside from a brief burst of spending in April and May that followed major weather disruptions, they’ve now fallen in four of the past seven months.
Not good. Not good at all.
In an era of record-low wage growth, soaring energy bills, falling savings rates and out-of-cycle mortgage rate increases, the spluttering performance understandably raised concerns about the health of household budgets, especially with other indicators pointing to a sharp drop in spending in discretionary areas.
To some, the weakness is not an anomaly but a sign of things to come, paving the way for a broader slowdown in household spending and, as a consequence, the broader Australian economy.
However, amidst all of that negativity, there may be some light at the end of the tunnel.
Not only has consumer confidence improved recently on the back of strong employment growth, there’s also signs that retail sales rose strongly in September, reversing the weakness seen in August.
The buyers strike could be over.
According to the National Australia Bank’s (NAB) Cashless Retail Sales Index, a measure of retail spending by NAB’s customer base, there was a solid rebound in spending recorded last month, offering an early indication that Australia’s official retail sales may report the same when it is released in two weeks time.
“Retail spending appears to have bounced back the month of September, after poor outcomes in both July and August,” said Alan Oster, Chief Economist at the NAB.
The index rose by a modest 0.2%, reversing a similarly sized decline previously reported in August. Despite the monthly increase, growth over the year slowed to 5.5%, down from 6.4% in August and well below the 8% level seen in the year to July.
While it only captures spending patterns using cash, cards and online payment portholes among the NAB’s customer base, Oster says it’s “reasonably assumed to be representative of aggregate non-cash retail sales in Australia”.
Essentially, it can be used to extrapolate spending patterns across the broader Australian economy.
Now we know the question you’re currently asking: Why should we believe this index?
While there are many other alternate spending indicators out there, the NAB index has perhaps carries greater clout than others as it correctly foreshadowed the weakness in Australia’s official retail sales report for August.
Though it has only been around for a short period of time, the early indicators suggest that it’s a reliable lead indicator for Australia’s official retail sales report.
And, with the index rising 0.2% in September, Oster says that there could be a nice bounce in sales with the ABS figures are released in early November.
“Based on movements in NAB’s data and our data mapping techniques, ABS retail trade is expected to rise by 0.6% in September which would reverse the published 0.6% decline in August,” he says.
“This is an encouraging signal.”
The relationship between the NAB index and Australia’s official retail sales report can be seen in the chart below.
That would be an encouraging signal after plenty of gloomy headlines, presuming the index is right again, of course.
While the bounce in the index offers near-term hope on the outlook for household spending, Oster remains cautious on the broader themes he’s seeing, noting that there are still plenty of headwinds to overcome before a retail recovery can be truly declared.
“We note that spending has continued to slow in yearly terms, suggesting we will need to see further improvement in coming months before declaring that severe pressure on retailers has come to a halt,” he says.
Oster says the surge in employment growth since March may support retail spending in coming months, referring to the 251,000 increase reported in the six months to August.
However, offsetting that positive, he says that several other factors may continue to weigh on spending levels.
“These include low wages growth, with recent analysis by NAB in its State Economic Handbooks showing that consumer spending has been outpacing labour income growth in nearly all states and territories,” he says.
“This is consistent with the decline in the national savings rate [given] it is not clear whether this has been voluntary or involuntary.”
He also says that high energy costs and elevated levels of household debt are also legitimate concerns of households at present.
The rebound in the NAB cashless sales index follows a bounce in the separate Westpac-MI Australian consumer sentiment index which rose to the highest level in a year in October, driven by improved confidence in the outlook for the Australian economy.
It’s only early days, but the improvement in both readings offers a glimmer of hope that things may be starting to turn the corner.
We’ll find out more on that front in the months ahead, starting with the Australia’s official retail sales report for September which will be released on Friday, November 3.