Retail sales smash record, helped by inflation

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HIGH consumer prices brought on by the current inflationary landscape have seen retail sales hit a new record, for the third month in a row.

According to the Australian Retailers Association (ARA) and the latest figures from the ABS, Australian retail sales hit a record-breaking $34.2 billion across stores and online in May.

“It’s pleasing to see retail sales maintaining their strong trajectory – however, the figures aren’t necessarily a true reflection of how the sector is performing in an inflationary landscape,” said Paul Zahra, CEO of ARA.

While that’s a 10.4% boost on this time last year and an increase of 0.9% on April levels, The ARA is warning that this growth probably won’t hold strong, with high inflation pushing up prices and elevating results.

“The high sales volumes can be partially attributed to the higher consumer prices we’re seeing across the economy, particularly in the food industries. Whilst sales are elevated, business costs are increasing enormously, in many areas at a far higher rate,” added Zahra.

Victoria recorded the highest increase in sales growth, on a  year on year seasonally adjusted basis, up 12.3%, followed by both Queensland and Western Australia with a 10.6% rise.

NSW saw a 9.8% boost on May 2021, with WA up 9.7%, Tasmania up 5.7%, ACT up 5.1% and finally NT up 2.3%.

“It’s unlikely we’ll see retail spending maintain these levels as the rising cost of living begins to take hold on family budgets. A generation of homeowners are experiencing their first interest rate hikes, so there’ll be some natural belt tightening. When people rein in spending, discretionary purchases are some of the first things they cut,” said Zahra.

Capital Economics Australia and New Zealand economist Ben Udy said the strong rise highlights the strength in the Australian economy and is consistent with its view that the Reserve Bank will continue to hike rates aggressively in the months ahead.

“What’s more, even if goods consumption growth was weak, we think services consumption is ramping up. Real services consumption was still 1.5% below its pre-virus level in Q1. And we think the rebound will have accelerated in Q2 as international travel normalises. Indeed, the 1.8% rise in sales at cafes and restaurants in May highlights that services spending continues to accelerate. Overall we’ve pencilled in a 1.7% q/q rise in consumption in Q2. That will keep the RBA on its aggressive hiking path this year,” he added.

“And consumers are well placed to keep increasing consumption in the months ahead. Admittedly, consumer confidence has softened and is now consistent with consumption growth coming to a standstill. And the surge in inflation means that real incomes will probably stagnate this year. But with the household savings rate still 5% above its 2019 average, households have plenty of scope to lift spending. On that basis we expect consumption growth to remain strong over the coming year.

“Further ahead though, those buffers will be exhausted. And we now expect house prices to fall by 15%, marking the deepest downturn in Australia’s modern history. Amidst falling housing wealth, we expect consumption growth to slow sharply in the second half of 2023.” Udy said.

But while spending is still elevated, consumers over the month where spending more money on cafés, restaurants and takeaway food, with this retail category lifting by 16.2%, compared to the same time last year.

Other retailing followed, up 15.5%, with clothing, footwear and personal accessories up 14.6%, department stores up 12.1%, household goods up 8.9% and food retailing up 6.2%.

“Leasing costs are going up for many businesses, along with fuel and energy, while supply chains continue to be constrained. There’s been no let up to the disruption since Covid hit; things have only intensified since the war in Ukraine and many small businesses in particular are challenged right now,” added Zahra.

This comes as Deloitte Access Economics’ latest quarterly Retail Forecasts report suggested retail price growth is forecast to peak at 5.5% over the year to December 2022, with the majority of retail turnover growth for the second half of the year and into 2023 and 2024 to be driven by prices not volumes.

“These challenges are running alongside the labour and skills shortages that continue to hamstring many in the industry. The majority of ARA members say the situation has gotten worse over the past three months, and without government intervention, the situation will only deteriorate,” concluded Zahra.

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