Early sales events push retail spend higher

Early end-of-financial-year promotions and mid-year sales events attracted consumers to the shops in May, with Australian retail turnover rising 0.6 percent, according to seasonally adjusted figures from the Australian Bureau of Statistics (ABS). This compares to a 0.1 percent rise in April and a 0.4 percent fall in March.

Robert Ewing, ABS head of business statistics, said consumers were “watchful” and motivated by discounts amid today’s high cost of living.

“Many retailers started end-of-financial–year sales early, offering larger discounts than usual and noted that shoppers remain price-sensitive in response to persistent cost-of-living pressures,” Mr Ewing said. “Retail businesses continue to rely on discounting and sales events to stimulate discretionary spending, following restrained spending in recent months.”

However, May’s boost belies “stagnant” underlying demand trends. Mr Ewing notes retail trading in trend terms is up by 1.5 percent over the year to May, which is very low. Gareth Aird, Head of Australian Economics at CBA, points out that population growth in 2023 was 2.5 percent, so on a per-capita basis a 1.5 percent lift in spending is exceptionally weak.

Mr Aird said shoppers are “savvy, cautious and price sensitive” and “more tactical than usual when determining when to spend on discretionary items”. Non-food retail was stronger than food retail in May, with the highest rise being a 1.6 percent lift in clothing, footwear, and personal accessories spending. Household goods spending lifted 1.1 percent.

Deloitte Access Economics partner, David Rumbens, says frugality is “back in vogue” with persistently rising prices for essentials like rent, insurance and utilities forcing consumers to cut back on discretionary purchases. An expected reduction in population growth as immigration reduces over the next year may also keep retail spending weak.

Deloitte’s latest retail forecasts point to a rocky road ahead, particularly if unemployment rises. Mr Rumbens said the 3.75 percent lift in minimum and award wages give consumers more spending power but will put pressure on business costs. He points out retail and hospitality insolvencies are increasing in today’s economy.

However, tax cuts and eventual interest rate cuts should lead to more retail spending in the second half of 2024 and in 2025. Deloitte forecasts no growth for retail spending overall in 2024 but a 2.5 percent uplift in 2025. “Household goods turnover should pick up more with better economic conditions and with an uplift in national building activity, supported by the Government’s ambitious housing targets,” Mr Rumbens said.

Australian home values rose by 8 percent over FY24 despite the impact of 13 interest rate rises between May 2022 and November 2023 putting immense strain on household budgets. A lack of supply of homes for sale amid strong buyer demand trumped the usual dampening effect of higher rates in FY24. Additionally, strong jobs and population growth coupled with relative affordability turbocharged home values in the two best–performing capital city markets of Perth and Brisbane, where median prices lifted 23.6 percent and 15.8 percent, respectively, in FY24.

CoreLogic’s head of research Eliza Owen notes that when interest rates began to rise in May 2022, there was a peak-to-trough 7.5 percent fall in the Australian median home price before a new growth cycle began in early 2023. Since then, there have been 17 consecutive months of growth. Property values in Sydney, Brisbane, Adelaide and Perth are now at record highs, having recovered all their losses in the downturn of 2022. Regional Queensland, South Australia and Western Australia are also at record-high median values.

“There are a few explanations for why housing values have continued to rise even as the cost of debt has risen, and borrowing capacity has eroded,” Ms Owen said. “Tight labour market conditions and an accumulation of savings through the pandemic have broadly underpinned mortgage serviceability, mitigating a need to sell as rates have increased, the construction sector remains squeezed, and unable to deliver a large backlog of dwellings, and strong population growth has increased demand for housing, both for purchase and rent.”

“The composition of buyers may also be propping up purchases, with higher deposit sizes indicating the current buyer profile may be less debt-dependent than when interest rates were at record lows,” she said.

Many first home buyers have higher deposits because of the Bank of Mum and Dad. Additionally, data from property settlement company PEXA shows one in four sales across the eastern states in 2023 were cash sales to buyers not purchasing with debt, who were therefore unaffected by higher mortgage rates. Such buyers included downsizing baby boomers and high-income earners and foreign investors in the prestige sector.

For most of this year, interest rate cuts have been anticipated due to falling inflation, which may have also stoked some buyer enthusiasm, Ms Owen said. However, recent data indicates inflation may be stickier than expected as it nears the Reserve Bank’s target band of two to three percent. As a result, some economists now expect at least one more rate rise to keep inflation on a downward course.

“Another rate rise would slow housing demand, and some cracks are already showing,” Ms Owen said. “Despite resilience in the headline numbers, there are some suggestions that demand is already weakening. Another 25 basis point rise in the cash rate in August, all else being equal, would take monthly repayments on the current median dwelling value to over $4,000 per month.

“Not only is this further out of reach for prospective buyers, it would likely also represent a further blowout in the premium of holding a mortgage relative to renting. The bigger that premium becomes, the weaker demand for purchases may become relative to renting, despite rent growth still sitting well above average.”

The Reserve Bank released the minutes of the board’s June meeting on Tuesday. In its deliberations, the board noted that the narrow path to returning inflation to target by 2026 “was becoming narrower” and recent economic data “reinforced the need to be vigilant to upside risks to inflation”. The board also noted that “the extent of uncertainty at present meant it was difficult to rule in or rule out future changes in the cash rate target”.

Early sales events push retail spend higher

Discounts prove irresistible to shoppers motivated by cost of living pressures

As talk of a rate cut before the end of the year quietens, another rate rise may be on the horizon