Retail spending in Australia plunges in December as a warning for the economy | The mighty 790 KFGO

By Stella Qiu

SYDNEY (Reuters) – Australian retail sales in December saw their biggest fall in more than two years as soaring borrowing costs and sky-high inflation finally eased spending, an economic shock that could lessen the need for much more tightening of policy.

Retail sales fell 3.9% in December from November after 11 straight months, Australian Bureau of Statistics (ABS) data showed on Tuesday, suggesting that rate hikes so far are working as intended.

It was also the biggest drop since August 2020, when parts of the country went into lockdown due to the COVID-19 pandemic.

The result fell far short of the median forecast of a 0.3% decline. The November result, which was fueled by Black Friday sales, was revised upwards to a 1.7% gain from an initially reported 1.4% gain.

“The sharp drop in December suggests retail spending is slowing due to high pressure on the cost of living,” said Ben Dorber, ABS head of retail statistics.

“Retailers reported that many consumers responded to this pressure by increasing their holiday shopping in November to take advantage of the extensive promotional activities and discounts associated with the Black Friday sales event.”

Investors reacted by dragging the Australian dollar down to $0.7046 from $0.7060 before the data, while cutting the implied peak for Reserve Bank of Australia cash interest rates to 3.7% compared to 3, 8% before.

Sales of consumer goods fell the most, including department stores, household goods retailers and fashion retailers. Department store sales fell 14.3% from the previous month.

The slide in prices wiped out the gains of the previous two months and, combined with rising inflation, meant that implied real selling also fell sharply in the fourth quarter, sapping a large part of economic output.

Inflation is already at a 32-year high of 7.8%, with a closely watched measure of core inflation, the trimmed mean, rising to 6.9%, well above the RBA’s own forecast of 6.5% lies.

“The RBA’s trade-off between containing inflation and maintaining some momentum in domestic demand is becoming increasingly difficult,” said Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics.

“With the impact of rate hikes not yet fully realized for 2022, we expect two more rate hikes in the first quarter.”

Analysts at ANZ expect consumption growth to slow into 2023, driven by higher interest rates and the recent fall in real wages due to high inflation.

After the data, futures markets were still pricing in a high 85% chance that the cash rate would be raised by a quarter point to 3.35% next week.

The US Federal Reserve is expected to hike rates by 25 basis points on Wednesday, followed by a 50 basis point hike the day after by the Bank of England and the European Central Bank.

Analysis by UBS on Tuesday predicts a sharp slowdown in spending by those keeping “extra” cash savings at a well-below-trend pace from mid-2023.

(Reporting by Stella Qiu; Editing by Kim Coghill and Jacqueline Wong)