Weaker than expected retail sales boosts the chance of an interest rate pause next week

Department stores had an “ominous” sales fall in June and food was the only category to report a rise, according to the ABS, as consumers savagely cut spending to lift hopes of a rate pause.

CEO of Ritchies supermarkets, Fred Harrison, sees consumers keeping to budgets and putting less in their baskets as cost of living pressures bite. Aaron Francis / The Australian

Weaker than expected retail sales that saw food the only category to report a sales lift and department stores suffering an “ominous” decline have boosted the chance of an interest rate pause next week as consumers tighten their belts.

The latest retail sales activity for June released by the Australian Bureau of Statistics on Friday has pulled back the curtains to reveal consumers and households under severe and worsening pressure from more than a year of interest rate rises by the Reserve Bank, soaring inflation and cost of living pressures.

Retail sales fell 0.8 per cent in June, coming in below the consensus forecast of a flat result, and annual sales growth slowing to just 2.3 per cent and comparable to the subdued pace seen just prior to the Covid-19 outbreak.

In the two most populous states of New South Wales and Victoria spending dropped by 1.1 per cent and 1.3 per cent, respectively.

Retail volumes - as opposed to dollar sales - were in negative territory, down 0.5 per cent for the quarter and placing the consumer in a more frugal state than even when the country went through the last major recession. Such is the distress of many consumers and the mounting pressures on household budgets it is the third consecutive decline in retail volumes – a result only seen during the GFC but not in the early 1990s recession.

Spending has dropped in NSW and Victoria. Picture NCA NewsWire / Ian Currie

“The sharp fall in June retail sales supports the case for the RBA to keep the cash rate on hold at 4.10 per cent,” said ANZ economist Madeline Dunk.

Although economists and analysts are divided over whether the RBA will tighten rates once again when it meets on Tuesday, with some still expecting a 25 basis point hike despite obvious signs the consumer is slowing down and inflation is moderating.

“When considered alongside our soft ANZ-observed spending data, today’s 0.8 per cent fall in retail sales paints a stark picture about how households are dealing with the current economic environment.

“Spending is slowing as household budgets are squeezed by rising mortgage payments and cost of living pressures,” Ms Dunk said.

Looking beyond the headline figure of a 0.8 per cent fall in retail sales for June there were troubling signs of a deepening pullback by consumers in all retail categories other than food with even that sector only managing to fall over the line with a 0.1 per cent rise for the month.

Department stores were particularly hard hit as consumers kept away and there were also strong falls across major retail categories such as household goods, fashion and footwear.

“Weakness was broad-based in June,” said Westpac senior economist Matthew Hassan.

“Department stores recorded a particularly big, and ominous, 5 per cent monthly fall. Clothing also down 2.2 per cent – both segments having recorded declines in May as well. ‘other retail’ also contracted 2.2 per cent but was coming off a solid gain in May.”

Mr Hassan said on a per capita basis the declines were worse, especially in the key eastern states.

“By state, weakness was again more pronounced in Victoria (–1.3) and NSW (–1.1). With population growth running at a faster pace in the major eastern states, the results imply an even larger decline in real per capita terms.”

Ritchies Supermarkets CEO Fred Harrison said most consumers were not tracking inflation month to month. Picture: Aaron Francis

Ritchies Supermarkets boss Fred Harrison, who runs one of the largest independent chains in Australia with a network of 75 stores, said shoppers were certainly holding back on their spending and filling their trolleys and baskets with less items as they battle cost of living pressures.

“If I look at grocery and liquor we are slightly in positive territory but not significantly in positive territory, we are probably talking about 2 or 3 per cent like for like increases across the board.”

He said most consumers were not tracking inflation month to month, rather were keeping to budgets and not spending more than that.

“And consumers are very good at looking at alternatives, and I strongly believe that often people will say to themselves ‘I have $200 to spend, inflation can do what it likes, I am only going to spend $200.

“Inflation might be 8 per cent it doesn’t mean consumers are going to spend $216, all it means they still have $200 allotted in their weekly budget for food and leave off non-essentials.

“And we are seeing people make that conscious decision to buy less, we are seeing item counts down across the basket.”

Australian Retailers Association chief executive Paul Zahra said it was a “precarious environment” for retailers as sales growth for essentials like food had masked an overall decline in retail spending.

“An increase of 2.3 per cent year-on-year is a concerning result for the industry, considering the impact of price increases and with most categories now in sales declines,” Mr Zahra said.

“Food makes up more than a third of retail spending and its performance is being inflated by unavoidable price increases. Despite overall sales growth, the reality is that we’re very much in the grip of a discretionary spending slowdown.

“It has become a precarious environment for retailers, who are simultaneously feeling the pinch of this spending slowdown whilst also at the mercy of rising operating costs across the board.”

Mr Zahra said shoppers had become far more spending-conscious due to the rising cost of living, and this was now evident in the latest ABS retail sales data.

“In last month’s retail trade data, clothing and apparel, department stores and other retailing were recording modest growth – we’re now seeing the lag effect on cost-of-living pressures come to fruition.”