Australia | Nov 17 2008
By Andrew Nelson
The volume of Q3 retail sales were weaker than expected despite tax cuts and the numerous other benefits of recent fiscal stimulus. The ex-inflation retail sales read increased by just 0.1% in Q308, falling well short of the market’s expectation for an increase of 0.4% or more.
ANZ Economist Riki Polygenis notes the largest increases in the volume of sales in Q3 were in clothing, soft good retailing and department stores, but this was partly due to the unwinding of the declines in these categories in the previous quarter. Otherwise food retailing was the strongest, notes ANZ, with sales at cafes, restaurants and takeaway food stores falling sharply.
Consumers are demonstrably cutting back on discretionary spending.
NSW was the main culprit, with sales falling 1.8%. Polygenis notes retail sales have now been falling in NSW for three consecutive quarters, suggesting the NSW economy is bearing the brunt of the recent economic slowdown and is teetering on the brink of recession. The ACT also posted negative growth in retail sales in the quarter, while retail sales were up in all other states.
The result follows a fall in sales volumes of 0.2% in Q2 and 0.1% in Q1, with sales now just 1.0% higher over the year. Economists at TD Securities note the weak result shows that despite $7.1 billion July personal income tax cuts and the start of the interest rate easing cycle, effective interest rates still remain high and the global credit crisis is still having a negative influence on household confidence.
TD Securities points out that another reason the result disappointed was the 0.1% lift came on the back of consecutive quarterly falls, so statistically speaking it should have been larger. Senior Strategist Joshua Williamson points out that every time there have been two consecutive declines, there has been a stronger rebound in the following quarter than what we saw in today’s Q308 data.
However, Westpac points out there were significant upward revisions to Q2 & Q1 numbers. All up, the previous Q1 read was revised from a 0.3% decline to just 0.1% down, while Q2 was adjusted to show a 0.2% decline as opposed to the unadjusted read of 0.6% down. Westpac notes this sees the yearly growth in real retail sales increase to 2.9% on the Q2 data release and 1% positive growth in Q3.
The bank’s economists point out these changes mean while the Q3 read came in below its expectations, the yearly read is still above the 0.8% it was expecting. The news isn’t that great given 1% retail trade growth is still the slowest pace of growth in almost eight years. So while the revisions have softened the slowdown somewhat, the Q3 retail figures clearly demonstrate Australian consumers are in a subdued mood.
According to ANZ, today’s read also suggests households were already scaling back the pace of their spending in Q3 prior to the latest bout of financial market distress despite the previous quarter’s income tax cuts. With the July tax package unable to stimulate spending, Williamson thinks there must be some doubt about how well the December fiscal stimulus package will work
The Q3 data also highlight downside risks to Q3 GDP, as Westpac notes the weaker result effectively lowers the consumer spending forecast by 0.1-0.2ppts, which raises the risk of a flat or slightly negative read on headline GDP in early December. ANZ agrees and has revised down its forecasts for Q3 GDP growth to 0.1% from 0.2%.
The small sliver of good news is that Westpac, TD Securities and ANZ expect a temporary improvement going forward given the additional fiscal stimulus, interest rate cuts and lower fuel prices, which should provide a major cash flow boost to Australian households.
ANZ expects a pick up in retail sales in Q408 and Q109, primarily because of the $8.7bn in handouts for pensioners and low income households in early December. Williamson also thinks that in combination with lower petrol prices, the stimulus package may be able to lift the pace of spending growth.
Westpac is more upbeat about the short term, saying it expects a significant rebound in Q4 given only a small portion of the boost needs to find its way into spending to produce a significant rise.
The problem all note is that the stimulus is temporary and the risks are that spending growth will decline further in 2009. After the easy money is gone, all three expect the process of household balance sheet consolidation to continue going forward, with consumers looking to consolidate and pay down debt rather than making discretionary purchases.
The dampening effect from weaker labour markets and wealth declines will only serve to exacerbate the problem.