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Retail sector nears turning point

  • July 19, 2023
  • by Property Australia
Higher inflation and interest rates drive consumer spending slowdown

The recent pause in monetary policy tightening, coupled with moderating inflation, could signal a turning point for the retail industry, according to a new report from Savills.

Following a period of expansion in the aftermath of pandemic restrictions, consumer spending is now experiencing a deceleration due to the impact of increased interest rates and inflation.

In March, nominal retail sales saw a modest increase of 0.4 per cent, with annual growth slowing to 5.4 per cent.

This is a significant decline from the peak of nearly 20 per cent observed in mid-2022 and marks the slowest growth rate in the past 18 months.

The slowdown is primarily driven by the continuous decrease in the household savings rate, which has now returned to pre-pandemic levels, the report noted. 

Most households have already utilised the additional income from pandemic stimulus measures, and their disposable income has been affected by the rise in inflation and interest payments.

Although the annual growth rate of nominal retail sales is slightly above its two-decade average of 4.9 per cent, headline inflation has risen by seven per cent in the year leading up to Q1/2023.

Real retail sales have declined over the past six months and show only a 0.3 per cent increase over the year. This is significantly below the two-decade average of 3.2 per cent, the report from Savills said.

The report said despite the overall slowdown in household consumption, certain sectors such as services and smaller discretionary purchases remain strong. 

Real retail sales for cafes, restaurants, and takeaway food services continue to experience robust growth, up by 12.5 per cent over the year. Additionally, department stores (+4.6 per cent y/y) and clothing, footwear, and personal accessory (+4.8 per cent y/y) retailing are also showing growth.

However, in the face of cost-of-living pressures, consumers are being more cautious about making significant discretionary purchases, the report found. As a result, real household goods sales declined by 3.7 per cent in Q1 and are now 8.9 per cent lower over the year.

“While the full impact of the interest rate increases on households and consumer spending is yet to be felt, an end to monetary policy tightening, coupled with moderating inflation, is beginning to boost consumer sentiment and represents a potential turning point for the retail sector,” the report said.