Australia: Retail Sales Fell In Wake Of Rate Hike

Australia: Retail Sales Fell In December In Wake Of Rate Hikes

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Retail sales values unexpectedly fell in December, suggesting the earlier resilience of the consumer has suffered at the hand of the RBA. After spiking 1.5%m/m in November, retail sales values fell 0.7% in December (J.P. Morgan and consensus: 0.2%), the first decline since July last year. The pull-back in spending occurred in the wake of the three straight quarter-point rate hikes delivered by the RBA in the final months of last year. The most recent hike marked the first time the RBA has hiked the cash rate in December, ahead of the key Christmas spending period, since 2003.

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Of the main retail categories, sales values at cafes and restaurants posted the sole rise in December (+2.5%m/m). The largest fall was at department stores, where sales slumped 3.5%. This suggests consumers reined in discretionary spending, but the fall also can be attributed to the significant discounting in the final months of the year. That discounting, and the resulting jump in foot-traffic, meant sales volumes were well supported. Retail sales volumes spiked 1.1%q/q in the December quarter, after falling 0.7% in the previous three months. The healthy volumes numbers are, of course, important for our 4Q GDP forecast, with retail sales accounting for a quarter of GDP.

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The retail numbers provide the first post-rate decision justification for the RBA’s choice to leave the cash rate unchanged on Tuesday. We now suspect that the RBA will sit on the policy sidelines for the next eight weeks, a period over which the Board will gather more information on the strength of the global economy, the state of financial markets, and the strength of the Aussie consumer following the assertive rises in market interest rate rises since October. On the domestic front, we suspect the economic data will paint a relatively healthy picture of the Aussie economy. In the coming week, for example, consumer confidence should rise to record highs (following the RBA’s surprise) and the Labour Force survey should provide further evidence that the unemployment rate has peaked.

The next rate hike probably will be delivered in early April; the cash rate should rise steadily thereafter to 5% by year-end. Our main concern is the troubling inflation outlook (core inflation looks to have bottomed-out above the RBA’s 2%-3% target range), meaning that policy will need to be in restrictive territory by 2011. Most of the RBA tightening we forecast for this year now will occur in the latter six months.

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ENDS

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