Australian retail sales unexpectedly decline, currency drops

(April 30): Australian retail sales surprisingly fell in March as households faced the prospect of higher borrowing costs for longer. The currency declined.

Sales slid 0.4% from the prior month compared with an estimated 0.2% gain, government data showed Tuesday. The outcome follows a downwardly revised 0.2% increase in February.

The Australian dollar fell as much as 0.4% while the policy-sensitive three-year government bond yield extended declines. Money markets pared back pricing for a November interest-rate hike to 35% from almost 60% on Monday.

The report contrasts with hotter-than-expected inflation data last week that prompted traders to reverse bets from a rate cut to a hike this year.  Economists are sticking with forecasts for easing, though they have pushed back the timing of the Reserve Bank’s first cut to November.

Commonwealth Bank of Australia’s Gareth Aird said in a research note Tuesday he now expects “a more elongated and conservative monetary easing cycle.”

“While the numbers do suggest that goods consumption is faltering, they tell us little about services spending, which is currently the bigger concern for the RBA,” said Abhijit Surya of Capital Economics which is predicting a 25-basis-point hike next week. “With households’ real incomes staging a recovery, consumer spending should pick up over the coming quarters.”

The RBA next meets on May 6-7 and is expected by most economists to leave its key rate at a 12-year high of 4.35%. Some predict the board will reinstate a tightening bias given the CPI surprise and that recent data showed the labor market remains tight.

Retail sales can be an important consideration in policy decisions given consumption accounts for more than half of gross domestic product. The RBA has repeatedly highlighted that the outlook for household spending remains a key uncertainty.

Governor Michele Bullock is hoping to engineer a soft landing in the economy, having lifted borrowing costs by 4.25 percentage points between May 2022 and November 2023. The resilience of households to higher borrowing costs is critical to her optimism.

From a year earlier, retail sales climbed just 0.8%, running well below the 4-5% pace seen in early 2023 as rate rises and other cost-of-living pressures weigh on household spending.

Sean Langcake, head of macroeconomic forecasting for Oxford Economics, said the report was weak, particularly considering the “brisk pace of population growth.”

“Strong price inflation for essentials like health and education and higher rent and mortgage costs are still putting the squeeze on household budgets and discretionary spending,” he said. “These data are a further confirmation that consumer demand is very restrained at present.”

Thursday’s retail data also showed: