Australia is in the midst of a “retail recession” as inflation and higher interest rates erode the buying power of consumers, according to a report by Deloitte Access Economics.
Retail turnover, once inflation is stripped out, sank 0.6% in the March quarter, or twice the pace of the retreat in the final three months of 2022. The June quarter is also likely to post a drop in retail sales, making it three consecutive quarters of decline.
“This retail recession isn’t a surprise,” said David Rumbens, lead author of the Deloitte report. “We’re also expecting consumer caution to extend further than just goods, with consumers expected to also pull back on services, which could result in a broader-based ‘consumer recession’ later this year.”
Indications retail spending is falling in real terms would probably please the Reserve Bank. It has raised official interest rates 12 times in 13 months – including earlier this week – in a bid to remove excessive demand in the economy.
The RBA governor said on Wednesday the “very mixed experience across households and firms” was one of the “complicating” elements to determining how high interest rates should go.
“The data that the banks share with us suggest that spending is most subdued among households with a mortgage, especially those that borrowed large amounts relative to their incomes over recent years, and households that rent,” Philip Lowe said, adding some households had “accumulated large additional savings during the pandemic and have not run these down”.
March quarter national accounts figures out on Wednesday showed household spending eked out a modest 0.2% in nominal terms, the weakest since Covid lockdowns across eastern Australia during the September quarter of 2021. Consumers drew down savings to keep spending on energy and other essentials, the ABS said.
CBA, Australia’s biggest bank, said the March quarter data indicated the economy contracted on a per capita basis, and a further drop would probably be confirmed in the June-quarter numbers.
“A recession now looks a distinct possibility in [the second half of 2023] and we put the chance at 50%,” CBA said. Recessions are usually measured by two consecutive quarters of GDP contraction.
The bank also lifted its expectations of how much higher the RBA will lift its cash rate.
“We now expect one further 25 basis-point increase in the cash rate for a peak of 4.35% and see it most likely at the August board meeting,” the economists said. “The risk is a 25bp rate hike earlier in July. And there is also a risk of 25bp rate rises in both July and August, which would take the cash rate to 4.6%.”
The Deloitte report said population growth could help Australia break out of its retail recession, with net overseas migration of 400,000 in the year that ends this month and another 315,000 expected in 2023-24. Increases in overseas student numbers would also help.
Total real retail turnover is expected to rise from minus-0.7% across calendar year 2023 to 1.3% in calendar 2024, it said.
“This return to growth would be spurred by more people and also more open wallets,” the report said. “As inflation continues to track down there is expected to be a point in 2024 where real wage growth becomes positive again.”
