Retail spending for December. A healthier picture than topline numbers suggest

The retail trade data for December released by the ABS today suggests households finished 2021 on a damp note, with retail spending falling back 4.4 percent on the month. But digging underneath the top line suggests a much healthier picture, although Omicron will put a short but sharp drag on the very near term. Indeed, the initial impact of the latest wave can already be seen, with turnover in cafes and restaurants falling 0.7 percent m/m despite the further re-opening of Victoria and the ACT in late November and the category’s relatively weak base spending on food services currently accounts for 12.8 percent of total retail spending, down from 14.2 percent pre-pandemic.

But the drop in cafes and restaurants turnover accounted for just 2 percent of the overall fall in spending. The majority of the decline was due to continuing shifts in household spending patterns towards spending in Black Friday sales and away from spending in the traditional December run-up to Christmas. The shift to e-commerce is a further driver of this trend, with Cyber Monday sales adding to momentum in November. Some retailers have reported Black Friday is now a bigger event than the Boxing Day sales. While the shift in the timing of spending is largely arbitrary, it has created a challenge for the ABS; their traditional seasonal filters aren’t yet able to fully account for the shift, resulting in an artificial boost to seasonally adjusted spending in November, followed by a correction in December.

Setting aside the timing of spending, in absolute terms turnover remains very buoyant (11.6 percent higher than the trough of the Delta lockdown in August). While January and February will be impacted by Omicron, the fundamentals underpinning households will remain solid over the near term. Consumer confidence indices are already improving, suggesting that as in previous waves, the pandemic is continuing to have less of an impact – households are learning to live with COVID. Furthermore, individuals have accumulated significant excess savings over the last two years (a result of limited opportunities to spend) and the buoyant labour market is now generating upward pressure on wages. While it’s unlikely that a significant amount of the accumulated wealth will be spent, this buffer should enable a relatively rapid recovery in spending from current income as cases subside and restrictions ease.

Moving through the rest of 2022 and into 2023, the pace of growth in retail spending is set to ease (notwithstanding month-to-month volatility) as households switch their spending back towards services, in particular travel and tourism. This process had begun in the June quarter 2021 but was paused by Delta and now Omicron. Furthermore, household disposable income will face cyclical headwinds from rising interest rates and more modest increases in employment (resident employment has now recovered to pre-pandemic levels), which will dampen growth across all categories of consumer spending.

Sarah Hunter, one of Australia’s most prominent economists, joined KPMG this week as a senior economist and partner in DTL’s Economics & Tax Centre.  

Sarah has spent the last 11 years as a leading economist with Oxford Economics, and for the last 6 years was the organisation’s Chief Economist in Australia. She has extensive experience building macroeconomic and econometric models that provide clients with in-depth economic analysis and forecasts. Her experience in multiple countries and disciplines makes her a fresh addition of perspective and diversity to the KPMG partnership.  

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