Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses retail sales and building approvals.
Australian retail sales registered an upside surprise in May, rising 0.6%mom while economists were only looking for a 0.3% rise. However, this came in the context of restrained spending from shoppers in the past few months and households taking advantage of early end-of-financial-year discounts. Retail volumes continued to contract on an annual basis, and this is the most significant “retail recession” we have seen in the history of the series in terms of both length and magnitude.
Source: ABS, AMP
Monthly retail data has been very noisy with changes in the timing of promotions, so it is more helpful to look at longer term trends to evaluate the health of Aussie consumers. On multiple metrics, the retail trend remains weak:
- Retail turnover is up 1.7% versus the same time last year and has remained in this range for the past few months (blue line in the above chart). This is much lower than the May inflation rate of 4% and much lower than the long-term average retail sales growth rate of about 5%.
- Strong population growth means that spending per person continues to trend down on an annual basis. Clearly households have tightened budgets further versus last year as retail volumes per person are down around 7.5% from their peak, so retailers have to rely on discounting to stimulate discretionary spending.
Source: ABS, AMP
The strength in the monthly figure was concentrated in a few discretionary items including clothing (+1.6%mom) and furniture (3.1%mom) – thanks to EOFY promotions, in addition to alcohol sales (+6.1%mom which is a reversal from the pullback in April).
- This was offset by weakness in department stores (-0.9%mom) and other recreational goods. Over the year though, sales from retail goods excluding food are only up 0.8% and have remained around flat for half a year.
- Bargain chasing is actually a sign of weakness as retailers have to rely on sales events to stimulate spending. It also means that we are likely going to see a contraction in these items next month. There might also be some “lipstick effect” in play, as consumers indulge in small luxuries rather than big-ticket items (cosmetic sales were up 3.1% this month!).
- Food sales excluding liquor have been largely stable, while dining out and takeaway revenues have now completely normalised after the post-covid spike. Café & restaurant spending fell 0.1% this month and is also experiencing slower growth than before the pandemic.
Source: ABS, AMP
Today’s building approvals data also surprised on the upside, increasing 5.5% over the month of May (versus an expected rise of 1.6%), thanks to upticks in both detached houses (+3.2%mom) and particularly apartments (+19.7%mom) which are often volatile.
- This is a welcome reading as Australia needs to build more homes to match up with demand; however building approvals are still running well below historical trend and especially below the rate of population growth: the pace of approvals is now running at only 161k dwellings per annum, while the peak during the apartment building boom in 2016 was about 240k and underlying demand is even higher at about 250k per year on our estimates.
- This week also marks the start of the new Housing Accord’s target of 1.2 million homes over 5 years, or 240k dwellings per year. However, it does not look likely that Australia is going to reach that target anytime soon (see the second chart below), as home building conditions will likely weaken with higher financing rates, the labour shortage continues and building material costs remain high.
- The chronic housing supply issue will remain a problem and put ongoing upward pressure on home prices and rents.
Source: ABS, AMP
Today’s suite of data is another upside surprise after a larger than expected rise in the May CPI indicator last week. They add to the risk of another hike from the Reserve Bank to rein in demand further and hence inflation. However, the big picture hasn’t changed materially in our view. Household budgets are still being hurt by high inflation and especially high dwelling and mortgage costs, and as a result, spending volumes continue to be squeezed, consumers are still seeking out promotions, and consumer sentiment indicated by surveys is still quite negative. While the RBA will almost certainly discuss the merit of another rate hike in the next meeting, they will likely put more weight on the next releases of inflation and retail data which will captures the full picture for the second quarter.
Ends
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