At last, consumers reach the spending cliff

Have Australian shoppers finally reached the spending cliff that analysts have been predicting for months? The retail sales numbers for December that show sales tanked 3.9 per cent are pointing to a yes.

Until December, the resilience in retail sales in 2022 had been gravity defying and an aberrant feature of the economy. The cost of living has soared over the past six months and interest rates have increased eight times in nine months – a cocktail that conventionally makes for a slowdown in retail spending.

But 2022 instead was a year in which retail sales rose for 11 straight months.

Consumers, finally, have started to close their wallets.

The enormous reservoir of savings that consumers accumulated during the COVID-19 pandemic has been gradually tapped and households currently enjoying low fixed interest mortgage payments are due for a rude reality of much higher rates when the low rates roll off over the coming months.

Economists knew the spending slowdown would ultimately hit but were caught off guard by the magnitude of December’s fall in retail sales. They had been expecting a 0.3 per cent fall on the back of a rise in November of 1.7 per cent.

But logically December was always going to be the test.

Once broad-based discounting is finished this week, the retail test will really begin.

Thanks to the cyber sale events in November becoming more popular each year, consumers have increasingly been doing Christmas shopping during these events, which by extension leads to December being a less important sales month.

This past November sales migration was arguably even more important as consumers looked to pocket some savings as cost of living pressures started to bite.

This will make January and February 2023 the months to watch.

Commentary from a number of retailers suggested the January sales event was reasonably strong.

But once broad-based discounting is finished this week, the retail test will really begin.

The potential for a sales cliff hasn’t been reflected in the share prices of many retail stocks. Since the start of January, Myer shares have soared 43 per cent, JB Hi-Fi has surged 16 per cent over the same period and shares in Solomon Lew’s Premier Investments have gained 11 per cent.

Myer recently reported a very strong sales trading period in the six weeks to Christmas, but this included Black Friday and Cyber Monday in late November.

The ABS data showed that the department store category was the hardest hit in December, falling 14.3 per cent in seasonally adjusted terms. Clothing, footwear and accessories experienced a tough December, notching up a 13 per cent decline in sales while household goods sales were down 7.8 per cent for the month.

Food retailing was the only category that experienced a gain – but it was only 0.3 per cent and sales were flat for cafes and restaurants.

But just how the decline in retail sales will feed into the Reserve Bank’s thinking on an interest rate rise next month remains to be seen.

Only a couple of weeks ago the market was factoring in a strong likelihood of a 25 basis point interest rate rise in February in response to inflation taking off again in November and strong retail spending.

But after the retail sales numbers were released on Tuesday, bond yields eased and the Australian dollar slipped back a little as expectations for where peak rates will land fell marginally.

On Tuesday, some commentary emerged that the RBA could hold off in February and allow it time to digest more up-to-date measures of inflation and spending.

But the consensus is that there will be another rate push next week despite growing protestations that some mortgage holders are finding it difficult to meet repayments.

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