Australia Dec retail spending nosedives in warning for economy

SYDNEY, Jan 31 (Reuters) – Australian retail sales posted their biggest drop in more than two years in December as rising borrowing costs and sky-high inflation finally dampened spending, an economic shock that could reduce the need for much more policy tightening.

Retail sales fell 3.9% in December from November, after 11 months of consecutive gains, Australian Bureau of Statistics (ABS) data showed on Tuesday, suggesting interest rate hikes are working as intended so far.

It was also the biggest drop since August 2020 when parts of the country were under lockdown due to the COVID-19 pandemic.

The result missed the median forecast of a 0.3% decline by a wide margin. November’s result, driven by Black Friday sales, was revised up to 1.7% from an originally reported gain of 1.4%.

“The big fall in December suggests that retail spending is slowing due to high cost of living pressures,” said Ben Dorber, ABS head of retail statistics.

“Retail businesses reported that many consumers responded to this pressure by doing more Christmas shopping in November to take advantage of heavy promotional activities and discounts as part of the Black Friday sales event.”

Investors responded by pushing the Aussie dollar lower to $0.7046, from $0.7060 before the data, while the implied peak for cash rates by the Reserve Bank of Australia was cut to 3.7% from 3.8% earlier.

Sales declined the most across discretionary goods, including department stores, home goods and fashion retailers. Sales at department stores fell 14.3% from the previous month.

The drop wiped out the gains made in the previous two months and, combined with rising inflation, meant that real sales also fell sharply over the fourth quarter, cutting into economic output.

Inflation is already running at a 32-year high of 7.8%, with a closely watched measure of core inflation, the shortened average, accelerating to 6.9%, well above the RBA’s own forecast of 6.5%.

“The RBA’s trade-off between taming inflation and maintaining some momentum in domestic demand is becoming more challenging,” said Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics.

“With the impact of the 2022 rate increases yet to be fully realized, we still expect two more increases to be delivered in the first quarter.”

Analysts at ANZ expect consumption growth to slow through 2023 due to higher interest rates and the recent decline in real wages due to strong inflation.

After the data, futures markets were still pricing in a solid 85% chance that the cash rate would be raised by a quarter point to 3.35% next week.

The US Federal Reserve is expected to raise rates by 25 basis points on Wednesday, followed the day after by 50 basis point increases from the Bank of England and the European Central Bank.

An analysis by UBS on Tuesday predicts a sharp slowdown in spending by those holding ‘extra’ cash savings to a well below trend rate from mid-2023.

Reporting by Stella Qiu; Editing by Kim Coghill and Jacqueline Wong

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