Australia Retail 1H/2023

HIGHER INFLATION AND INTEREST RATES DRIVE SLOWDOWN IN CONSUMER SPENDING

After a period of exceptionally strong growth coming out of pandemic restrictions, consumer spending is slowing as the impact of higher interest rates and inflation begin to bite. Nominal retail sales rose by 0.4% in March, with annual growth slowing to 5.4%, down from a peak of nearly 20% in mid-2022, and the slowest growth rate in 18 months.

Driving the slowdown is the ongoing decline in the household savings rate, which has fallen back to pre-pandemic levels. Households have largely spent the income boost from pandemic stimulus, while higher inflation and interest payments have eroded household disposable income.

While the 5.4% annual growth in nominal retail sales is a little above its two-decade average growth rate (4.9%), high inflation means the growth in real retail sales has been much lower. With headline inflation rising by 7.0% over the year to Q1/2023, real retail sales have declined over the past six months to be just 0.3% higher over the year, well below the two-decade average of 3.2%.

Although overall household consumption has slowed, spending on services and smaller discretionary purchases continues to be robust. For example, real retail sales for cafes, restaurants, and takeaway food services continues to record strong growth, up by 12.5% over year, while department store (+4.6% y/y) and clothing, footwear, and personal accessory (+4.8% y/y) retailing are also seeing solid growth. By contrast, consumers are making fewer large discretionary purchases in the face of cost-of-living pressures, with real household goods sales declining by 3.7% in Q1 to be 8.9% lower over the year.