Australia Q4 retail sales hit two-year high but Christnas season weakens

Australian retailers boasted their best quarter of sales in two years, a sign that the economy had likely averted its first recession in 25 years, though shoppers turned frugal into the Christmas holiday season.

Data from the Australian Bureau of Statistics (ABS) out on Monday showed real retail sales for the quarter-ended December matched expectations to rise 0.9%, from a flat July-Sept.

Retail contributes about 17% to Australia's A$1.6trn annual economic output, and is the second-biggest employer after healthcare.

Data on Australia's gross domestic product for the December quarter is due March 1 and economists generally expect the pace of growth to have rebounded after a shock contraction in the July-September period.

Cementing that view, figures out last week showed Australia posted a record trade surplus in December while measures of business confidence and conditions had bounced too.

However, Monday's data showed price gains remained very muted with the retail deflator rising just 0.3% in the quarter, a worrying sign for underlying inflation which is below the central bank's target band of 2%-3%.

"The Q4 result shores up our expectations for the Q4 national accounts but suggests that for many retail businesses conditions are more difficult than the volume data indicates," said Matthew Hassan, senior economist at Westpac.

LOSING MOMENTUM

Sales actually fell 0.1% in December, upsetting forecasts of a 0.3% increase and revealing a disappointing lack of momentum heading into 2017. It was the first monthly decline since December 2015 and only the third in about as many years. The increases in October and November were revised lower too.

In another worrying trend, homeware sales tumbled 2.3% in December, the first drop since mid-2016 and the biggest in more than four years. While retailers shipped more household goods over the fourth quarter they had to discount prices to do it.

"While consumption growth is unlikely to collapse, we suspect it will slow...this year due to persistently low wage growth and modest employment growth," said Kate Hickie, economist at Capital Economics. "It could be an early sign that the housing market won't support consumption as much this year."

Household consumption accounts for 56% of GDP, versus the less than 9% produced by Australia's emblematic mining industry.

The A$300bn retail industry has been suffering in the face of intense foreign competition and as Australians become more cost-conscious.

Yet, people are spending on other things, such as healthcare, education and foreign travel - none of which shows up in the retail sales data. The data also excludes sales of vehicles, fuel and purchases made online.

The ABS's experimental estimate of online retail sales jumped 14.1%  in December, enjoying a fifth month of solid gains to reach A$1.3bn.