Australian retail sales lose momentum as tax cuts fail to excite shoppers By Reuters

By Stella Qiu

SYDNEY (Reuters) – Australian retail sales were flat in July after two months of upbeat results, showing that broad-based tax cuts have yet to boost spending and bolstering expectations that the next move in interest rates will come down.

Data from the Australian Bureau of Statistics (ABS) showed on Friday that retail sales were flat in July month-on-month, slowing from a 0.5% rise in June. Analysts expected an increase of 0.3% in July.

Sales rose 2.3 percent from a year earlier, down from 2.9 percent the previous month, as consumers grappled with inflation and high mortgage rates. This was a poor result compared to the country’s population growth of around 2.6%.

Spending on clothes and department stores was hit, down 0.6% and 0.5% month-on-month respectively in July, while cafes, restaurants and takeaways fell 0, 2% as shoppers became frugal.

Food retail was the only category to show growth, up 0.2%. Indeed, Australian grocers Coles and Woolworths posted decent profits.

“Overall, it is clear that there was little momentum behind consumer spending at the start of the quarter. And while it’s early days, the data broadly reinforces our view that Australian households are in no rush to spend their new tax cuts,” said Abhijit Surya. Economist in Australia and New Zealand at Capital Economics.

“At the margin, weakness in household consumption increases the risk that the RBA will cut rates before Q2 2025, as we currently forecast.”

This weakness is the result of high interest rates, with the Reserve Bank of Australia (RBA) raising rates by 425 basis points to 4.35% from May 2022 to tame inflation, which was 3.5% in July, over the bank’s 2-3% target. band.

Policymakers have ruled out a near-term rate cut, fearing that consumption could rise more than expected as real incomes turn positive thanks to the government’s massive tax cuts in July, giving average earners an extra 1,500 USD per year.

Home prices have also hit record highs this year as an influx of immigrants stretches limited supply, boosting the wealth of homeowners.

Recent bank data on card transactions suggests July was slow, with Westpac noting that consumers are mostly on the extra cash from tax cuts rather than spending it, and the third quarter is likely to be a another weak quarter.

Markets cut bets on a rate cut this year after July inflation slightly beat expectations. A first relaxation in December is no longer a done deal, with only an 80% probability.