Originally published by AMP Capital
This was a bit greater than expected and follows a run of soft Australian economic data releases since Christmas for credit, house prices, building approvals, car sales, job ads and business conditions PMIs.
We see retail sales growth being weak over the year ahead (averaging around 2.5-3% annual growth) as jobs growth slows, wages growth remains weak and falling house prices weigh on consumer spending via a negative wealth effect making households want to increase their saving rate (in contrast to the falling trend in the saving rate seen in recent years). Weak pricing power will also weight on nominal retail sales growth. Reports of weaker than expected avocado sales – less demand for smashed avocado and feta on rye toast? – may be telling us something.
While reasonable growth in November and October retail sales are consistent with a better contribution to growth from consumer spending to December quarter GDP growth, it’s hard to see it being sustained. Our assessment remains that the next move in official interest rates will be a rate cut thanks to sub-par growth, the negative impact of falling house prices, weak wages growth and sub-target inflation.
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