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Retail trade rose by 0.2% in February following a spike of 1.2% in January.
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Annual growth slowed to a still respectable 4.9%.
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The February result was driven by a lift in discretionary spending – in particular, spending on household goods.
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The overall trend in retail spending remains positive indicating that consumers are responding to low interest rates and rising house prices.
February’s modest lift in retail trade was below market expectations which were centred on a rise of 0.3% (CBA (f) 0.5%). The relatively soft outcome was a result of statistical payback following the big jump in sales over January. The overall trend in retail trade is an upbeat story. Retail trade growth has been on a strong uptrend since August last year. Monetary policy stimulus is working and the growth transition is underway.
The detail in today’s data reveals are more positive story, notwithstanding the soft headline result. The 0.2% lift in sales over the month was driven by an increase of 0.5% in discretionary spending. Spending on non‑discretionary items fell over the month. Spending growth was strongest on household goods, rising by 2.0%. The substantial lift in residential construction that will occur over 2014 will support spending on household goods. We expect this component of retail trade to record strong growth outcomes over the year.
Across the other categories, there were increases in other* (+1.9%), clothing, footwear and personal accessories (+0.1%), and cafes and restaurants (+0.1%). Spending at cafes and restaurants has been the strongest component of retail trade over the past year. Annual growth is up a whopping 10.3% over the year. An indication that consumer caution has receded. Falls were recorded in food retailing (‑0.2%) and department store spending (‑4.7%).
For the States, retail trade growth was strongest in Vic (+0.5%). This was followed by WA (+0.4%), Qld (+0.1%), and NSW (+0.1%). Sales were flat in SA and fell in ACT (‑0.1%), NT (‑0.6%) and Tas (‑1.4%). On an annual basis, retail trade growth has been strongest in Australia’s two largest States, NSW and Victoria. This has been in line with the largest house price appreciation in Sydney and Melbourne and is indicative of the correlation between house price growth and consumer spending (see chart over the page). Also consistent with the growth transition from mining to non‑mining States. Retail trade growth in WA has been relatively soft over the past year and we suspect that some of the softness can be attributed to discounting on services as mining construction slows.
From a policy perspective, today’s figures confirm that the underlying trend in retail trade remains intact and that the monetary policy transmission mechanism is working. Interest rate cuts have played a major role in lifting dwelling prices which has strengthened household balance sheets. This in turns supports consumer confidence which spills over to an increase in consumer spending.
The most recent Australian GDP figures showed that the household savings ratio fell over QIV, albeit from a high level. So it looks like low interest rates are also playing a role in slowly shifting the preferences of households from high levels of saving and spending restraint to increased consumption.
In summary, a soft headline result, but a reasonable set of numbers in the context of a sustained pick‑up in consumer spending over an extended period. Consumer spending looks set to make a solid contribution to QI GDP growth.
*other retailing includes newspaper and book retailing, recreational goods retailing and pharmaceutical, and cosmetic and toiletry goods retailing.
