Australian retail sales drop more than expected in December

Australian retail sales fell 2.7% in December, after 1.6% rise in November, driven by Black Friday’s strong spending and strongly disappointed expectations for 1% drop.

Unexpectedly strong drop in December slowed growth in spending to the pace last seen in August 2021, when parts of the country were paralyzed by strict Covid lockdown measures.

December’s drop in sales was mainly driven by drop in sales of optional goods, while spending on household items was down 8.5%, in comparison to 6.5% gain previous month and spending on food ticked up by 0.1% in December.

Economists see current annual growth rate of 0.8% as very weak and signal that underlying retail spending remains subdued, adding to warnings of recession.

Persisting pressure on household budgets is mainly to be blamed for a drop in retail sales, but data also add to signals that the Reserve Bank of Australia will not hike interest rates in the first policy meeting in 2024 next week, while expectations for a rate cut in August continue to grow.

The RBA has raised interest rates by 425 basis points to a 12-year high of 4.35% since May 2022, and consumers have been limiting spending on optional goods amid elevated costs of living and high mortgage payments, though some relief for shoppers could be expected in the second half of the year when reworked tax cuts take place.

Markets focus on closely watched inflation report for the fourth quarter, due on Wednesday, with expectations that headline consumer inflation likely eased to a two-year low of 4.3%, adding to signs that interest rates do not need to rise any further.