Spending volumes are dropping sharply as rising prices squeeze households’ finances. Today’s result was well below both our forecast and market expectations.
Q2 real retail sales (volumes): -1.0% (Prev: -1.6%)
- Westpac f/c: -0.1%, Market -0.4%
Q2 nominal sales level: -0.2% (Prev: -0.9%)
Today’s retail spending report highlighted that financial pressures are continuing to eat away at households’ purchasing power, with the value of total spending also declining despite very strong population growth and a recovering tourism sector. Indeed, excluding the pandemic period, per capita spending fell to its lowest level in four years.
Nominal spending fell 0.2% in the June quarter. With a 5% increase in spending on motor vehicles broadly offset by a 7% decline in spending on fuel, spending in the more stable ‘core’ categories (which exclude vehicle-related purchases) fell by a similar 0.3%. This marks the first decline in core nominal spending since the September 2021 quarter, when spending was curtailed by the Delta Covid-19 outbreak.
The picture looks even weaker when taking into account changing prices, which at the core level increased 1.5% over the quarter. Core retail volumes declined 1.8% in the June quarter and now sit 5.1% lower than a year earlier. Discretionary spending has borne the brunt of the slowdown with volumes in the restaurant/bar and recreational goods sectors down more than 4%. Spending at hardware and garden stores and clothing and footwear stores fell almost 5%.
Looking ahead, with around $15bn of fixed mortgages repricing at higher interest rates each month, the pressure on households’ finances will continue to build. Together with ongoing increases in consumer prices – albeit hopefully moderating over time – and falling rural sector incomes, this will be a persistent drag on spending levels going forward. Unfortunately for households, as the Reserve Bank made clear last week, interest rates are likely to remain at or above current levels for some time yet, and certainly until inflation is much closer to returning to the midpoint of the 1-3% target range.
Implications for GDP growth
While we had anticipated a soft result, today’s figures are weaker than we had expected. Nonetheless, after two quarters of contraction, we continue to estimate that the economy rebounded somewhat in the June quarter, led by what is likely to be a short-lived lift in export volumes. Even so, annual growth in the economy is very likely to have continued to slow in the June quarter and will almost certainly slow further in the September quarter.
