Australian retail sales fell unexpectedly in February, adding to concerns about the ability of household spending to bolster economic activity and inflationary pressures in the quarters ahead.
According to the ABS, sales fell by 0.1% in seasonally adjusted terms, a result well below the 0.3% increase that had been expected by economists.
Demonstrating the scale of the miss, it was below even the most pessimistic individual economist forecast offered to Bloomberg.
It was also the second decline in sales reported in the past three months.
The ABS said there were falls in clothing, footwear and personal accessory retailing (-2.5%) and household goods retailing (-0.4%).
Offsetting those declines, the ABS said that food and in department store sales rose by 0.3% and 0.8% respectively. Sales in other retailing, and in cafes, restaurants and takeaway food services, were unchanged.
The result followed a 0.4% increase for January, but another 0.1% decline in December in seasonally adjusted terms.
The retail sales report measures changes in nominal spending on retail goods from one month to the next.
A surprising feature of the February report, particularly given the strength of construction activity in the eastern states, was the decline of 0.4% reported for household goods.
This was largely driven by a fall of 2.5% in the furniture, floor coverings, houseware and textile goods subcategory, the ABS said.
Tom Kennedy, an economist at JP Morgan, said that sales excluding food, something that he calls a “proxy for discretionary spending”, fell by 0.4%, the second decline recorded in the past three months.
“Most of the drag on aggregate discretionary sales appears to be the result of a sharp drop in sales at clothing/footwear/accessory retailers, though spending at household goods and ‘other’ retailers also moved lower,” he says.
By state and territory, sales fell in Western Australia (0.7%), Victoria (0.3%), Queensland (0.2%), Tasmania (0.5%), and the Australian Capital Territory (0.5%), overshadowing gains of 0.4% in New South Wales and the Northern Territory, along with a small 0.1% increase in South Australia.
As a result of the decline registered in February, growth in national sales over the past year slowed to just 2.7%, the lowest level reported in close to four years.
To Kennedy, the breakdown between discretionary and non-discretionary spending over that period was even more concerning.
“The composition of spending was also weaker than we had anticipated, with sales at non-discretionary retailers holding steady at 3.3% year-on-year, while at the same time discretionary spending growth sank a full percentage point to 1.9% year-on-year,” he said.
“Interestingly, the ABS trend measure of retail sales — which looks through short term volatility — has also faded in the past six months and following today’s release stands at an unimpressive 0.1% month-on-month.
Whether in year-on-year terms or using trend data, it’s clear that sales growth is slowing sharply.
This, says Kennedy, suggests the strength in household consumption seen in the final three months of 2016 is unlikely to be sustained.
“In quarterly terms, nominal retail sales are tracking an increase of 0.37% quarter-on-quarter between the December and March quarters,” he says.
“If realised, this outcome would mark one of the softer quarterly retail sales prints in recent history and supports our view that the pop higher in real household consumption (in the December quarter), driven by a plunging saving rate, is likely to prove unsustainable.
Kennedy says that the current trend in sales is problematic for the RBA, and calls into question whether the Australian economy can grow at a rate sufficient to get core inflation back to within the bank’s 2-3% target.
Economists at UBS agree with Kennedy’s assessment, suggesting that the cost of home ownership in Australia could be crimping household spending.
“Broad-based weakness in February retail put Q1 sales to date up just 0.4%, less than half Q4’s 1.1% pace,” the bank’s Australian economics team wrote following the release of the report.
“Despite sharply rising ‘wealth’, today’s data suggests Q4’s stronger consumer is flagging, both a risk to the 2017 growth outlook, but also possibly signalling little inflation pressure in the Q1 CPI print due at the end of this month.”
UBS notes that Australian house prices, as reported in CoreLogic’s capital city house price index released earlier today, grew by 12.9% in the 12 months to March, some four times faster than household incomes.
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