Australian retail sales shift into reverse in December

Australian retail sales flipped into reverse in December as shoppers restrained themselves after a big splurge the month before, while annual growth in spending slowed to lows last seen during the COVID-19 pandemic lockdowns.

Retail sales slid in December 2.7 per cent on a seasonally adjusted basis, after rising 1.6 per cent in November as Black Friday bargains brought spending forward, data from the Australian Bureau of Statistics (ABS) showed on Tuesday.

Analysts had looked for a drop of at least 1 per cent in December.

Sales of A$35.2 billion ($23.27 billion) were up just 0.8 per cent from a year earlier, the slowest pace since August 2021 when COVID lockdowns paralysed parts of the country.

An annual rate of 0.8 per cent is typically only seen in recessions and considered very weak given the country's rapid population growth.

"This shows that underlying retail spending remains subdued when we look through the volatile movements over recent months in the lead up to Christmas," said Ben Dorber, ABS head of retail statistics.

The pressure on household budgets is one reason that financial markets are almost certain the Reserve Bank of Australia will not hike interest rates next week in the first policy move of the year and are looking for a cut in August with more than 70 per cent conviction.

The Australian dollar were little changed at $0.6620, while three-year bond futures hit a high of 96.34 before settling back at 96.31, up 5 ticks on the day.

Interest rates have risen by 425 basis points to a 12-year high of 4.35 per cent since May 2022, and consumers have been curtailing spending on discretionary goods amid elevated costs of living and high mortgage payments.

Shoppers will get some relief in the second half of the year when reworked tax cuts take place.

The much watched four-quarter inflation report is due on Wednesday. Economists expect headline consumer inflation likely eased to a two-year low of 4.3 per cent, adding to signs that interest rates do not need to rise any further.

The December report showed that the drop in sales were driven by discretionary goods, with spending on household items down 8.5 per cent, more than reversing a 6.5 per cent gain the prior month.

Consumers also spent less on everything but food, although spending on food just edged up 0.1 per cent.

Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, noted retail volumes are likely to have been close to flat in the quarter, making little contribution to economic growth.

"Tighter policy settings are working to restrain demand, and growth in retail sales over the first half of the year is likely to be quite patchy."