High interest rates and inflation are forcing consumers to shut their wallets, dragging down economic growth amid warnings the Reserve Bank will have to reverse its aggressive tightening of monetary policy next year.
Retail sales were flat in April, the Australian Bureau of Statistics reported on Friday, after a 0.4 per cent lift in March and a 0.2 per cent increase in February.
The result, well short of market expectations, was buoyed by one-off major sporting events – including the AFL’s Gather Round in Adelaide – but revealed consumers are starting to wind back spending including on necessities such as food.
Spending on household goods surged during COVID as consumers, trapped in their homes by pandemic restrictions, upgraded their kitchens, home offices and lounge rooms.
But spending on household goods has fallen for three consecutive months and is now where it was in October 2021. Expenditure on clothes and footwear has barely moved in nine months.
Food retailing through the nation’s supermarkets, which normally tracks population growth, has grown for the past 13 consecutive months until April when it fell slightly.
Total retail spending is now back to where it was in October last year. Over that same period, the working age population has climbed by about 270,000.
According to economists with NAB, as a share of the working population retail sales have been reduced by 1.3 per cent over the past six months.
Retail spending accounts for 17 per cent of GDP. Reports from major retailers of a slowdown in spending, including a switch to cheaper house brands or buying goods in bulk, have climbed as the Reserve Bank has lifted interest rates at three of its four board meetings this year.
The Commonwealth Bank’s head of Australian economics, Gareth Aird, believes the RBA will have to slice official interest rates by 1.25 percentage points by the end of next year, taking the cash rate back down to 2.6 per cent. Such a reduction would save a person with a $600,000 mortgage almost $500 a month.
Aird said the Reserve will sit on its hands at its meeting next month as the evidence grows that previous rate rises are slowing the economy.
“The rate of inflation in the economy will not drop to the desired level overnight. But the data is encouraging and is directionally moving the right way. The case for additional RBA policy tightening is waning,” he said.
The bureau’s head of retail statistics at the bureau, Ben Dorber, said early cold weather in April prompted some shoppers to bring forward their spending on winter clothing.
But for the past six months, retail sales had been flat as consumers struggled on multiple fronts.
“Retail turnover has plateaued over the last six months as consumers spent less on discretionary goods in response to cost-of-living pressures and rising interest rates,” he said.
The flat result in April occurred in the month the Reserve Bank held interest rates steady. It lifted them again in May to 3.85 per cent.
St George Economics senior economist Pat Bustamante said consumers were now buying fewer items than they were last year.
He said spending on discretionary goods had fallen by 2.3 per cent, notwithstanding the increase in the nation’s population.
“Spending leads the economic cycle, with labour market conditions and inflation following. The clear signal from today is that spending is stalling. We expect this to continue as cash rate hikes to date are fully transmitted to households,” he said.
All major banks are picking up through their debit and credit cards a slowdown in spending.
Westpac on Friday reported a five percentage point drop in its own measure of card activity in the two weeks to May 20, with consumer-related purchases now “firmly in negative territory”.
Bank senior economist Matthew Hassan said there had been material slowdowns for travel and hospitality, education, basic food and pharmaceuticals.
“The detail shows a broad-based slowing in annual growth, across both discretionary and essential categories, and across both goods and services,” he said.
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