Annual growth in retail sales has fallen to its lowest level since the pandemic as cash-strapped households tighten their belts, but economists expect tax cuts on July 1 to breathe new life into consumer spending.
Retail sales grew by just 0.8 per cent in the year to March, after spending unexpectedly contracted 0.4 per cent last month in seasonally adjusted terms, the Australian Bureau of Statistics said on Tuesday.
“Outside of the pandemic period and introduction of the GST, this is the weakest growth on record when comparing turnover to the same time in the previous year,” ABS head of retail statistics Ben Dorber said.
Investors pared back expectations of a rate rise following the release of the data. Markets now price just an 25 per cent chance of a rate rise by September, down from 47 per cent on Monday.
Economists agreed the persistent weakness in household spending made the prospect of another interest rate rise less likely. The RBA is banking on the softness in the household sector to translate into an easing in domestic inflation and a broader economic slowdown.
But that process is taking longer to play out than the central bank had expected, with surprisingly strong March quarter inflation figures last week leading markets to price in the probability of another rate rise, after previously forecasting rate cuts.
Fiscal stimulus to boost spending
JPMorgan economist Jack Stinson said he expected real household spending to pick up over the rest of the year, as household finances recovered thanks to higher wages and government support.
The stage three tax cuts, which come into effect on July 1, are expected to deliver a 1.4 per cent to 1.5 per cent increase in real household disposable income. Treasurer Jim Chalmers has also flagged additional cost-of-living support in the May budget.
While inflation is proving surprisingly persistent, Oxford Economics Australia head of macroeconomic forecasting Sean Langcake said the tepid retail sales figures confirmed consumer demand was very restrained.
“Considering the brisk pace of population growth, this is a very soft trend,” Mr Langcake said.
However, he agreed the broader outlook for consumer spending would improve this year as real wages continued to picked up.
“But for now, strong price inflation for essentials like health and education and higher rent and mortgage costs are still putting the squeeze on household budgets and discretionary spending.”
Purchases of household goods such as furniture and appliances have experienced the sharpest downturn in sales volumes since the RBA first raised rates in May 2022, falling 3.2 per cent over the past year.
Spending on clothes has also fallen over the past year, down 0.4 per cent, while transactions at department stores were 0.2 per cent lower.
While spending on food increased 2.2 per cent over the past 12 months, this partly reflects inflation, which has caused the price of supermarket staples to rise.
Citi chief economist Josh Williamson said the weakness in discretionary spending meant further price falls in the retail components of the consumer price index should be expected.
“The RBA board now has more space to deliver a balanced message next week, that is, it can continue to state that it ‘is not ruling anything in or out’,” he said.
The ABS said some of the weakness in sales in March owed to consumers cutting back after a Taylor Swift-fuelled spending splurge in February.
Clothing and accessories spending fell 4.3 per cent last month after surging 4.9 per cent in February.
Victoria and NSW, the only two states where Swift performed the Australian leg of her Eras tour, recorded the sharpest falls in spending of any state in March.