Retailers warn on tough Christmas conditions as tax cuts banked

Retailers are expecting tougher conditions through the all-important Christmas trading period as consumers continue to save, rather than spend, almost all of the extra income they have received from the stage three tax cuts.

The retail sector has warned of tough Christmas conditions as shoppers choose to save, not spend, income tax relief. Picture: NCA NewsWire / David Crosling

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Retailers are expecting tougher conditions through the all-important Christmas trading period as consumers continue to save, ­rather than spend, almost all of the extra income they have received from the stage three tax cuts.

While the tax cuts have bolstered household incomes, Australian Retailers Association chief executive Paul Zahra said he anticipated the slowdown in discretionary spending to continue in the months ahead, with smaller businesses most acutely affected.

“It’s going to be a fairly subdued Christmas,” the former David Jones boss warned.

Mr Zahra added that retailers had reported that the stage three tax cuts had not translated into an increase in sales.

“Consumers are actually holding tight to their dollars,” he said.

“They’re trying to budget, shoppers are waiting for deals, value and the big Black Friday sale event.”

During the six-week peak festive shopping season, the retail lobby group has forecast spending to total $69.7bn, 2.7 per cent higher than last year and just outpacing the annual rate of inflation which was 2.4 per cent on the most recent measure.

In the three months since the federal Labor government’s revamped tax cuts took effect on July 1, Westpac analysis showed customer spending had increased by just 1.5 per cent – translating to an average of $138, far less than the average benefit of the tax ­benefit at $604.

Across the economy, households were spending 16 per cent of the additional income, while the remaining 84 per cent had been ­directed to deposit or offset ­accounts, with the largest increase in spending coming from those on the lowest incomes, the analysis showed.

Westpac economist Jameson Coombs said while there could be a delayed increase in spending, the data so far suggested there would not be a pre-Christmas splurge.

“You almost definitely will get an increase in spending later in the year, but it’s a case that it’s a normal end of the year,” Mr Coombs said.

“There’s nothing at the ­moment to say that’ll be bigger than in past years.”

Stephen Smith, partner at Deloitte Access Economics, agreed growth in consumer spending would likely be limited, with the retail trading environment subdued over the Christmas period.

“It may be another Christmas where discounting becomes really important in order to drive volume,” he said. “Christmas may be a slightly softer one again for retailers this year.”

While consumers had shown a muted response to the tax cuts, Mr Smith said a Reserve Bank rate cut would be “pretty significant” in improving the outlook for household borrowers who have experienced a sharp increase in borrowing costs over the past 2½ years.

“Unfortunately, it’s looking less and less likely that a pre-Christmas rate cut is in store, that’s really a 2025 story,” he said.

Investors and the vast majority of economists are tipping the RBA will hold off on lowering interest rates until 2025, with money ­markets fully priced for a quarter percentage point cut at the RBA’s May board meeting which would take the official cash rate to 4.1 per cent.

The RBA has previously warned that the tax cuts could cause a strong increase in spending, therefore exacerbating inflation, but independent economist Nicki Hutley said a rise in ­consumption was unlikely to warrant greater caution from the central bank.

“As long as demand remains well behaved, even with a little rise before Christmas, that’s well within their forecasts,” she said.

“Certainly that leads you to think a rate cut in the new year is on the cards.”