Household budgets are under pressure as wage growth remains subdued and non-discretionary prices rise. Despite the difficult financial conditions, retail spending improved in 2017-18 as consumers dipped into their savings to support spending activity. But this can’t last forever. A further pick up in retail spending is dependent on stronger wage growth, which may take some time to eventuate.
Overall, real (inflation-adjusted) retail sales grew 2.6% in the 2017-18 financial year. This was an improvement on the 1.9% gain in 2016-17, driven by a strong 1.3% quarterly increase in June. Looking forward, real retail sales growth in the 2018-19 financial year is expected to remain around the 2.6% mark. However, more of that spending may go to the food sector, which could outpace non-food spending for the first time since 2012-13. Meanwhile, retail price growth (which was zero in 2017-18) is expected to pick up in 2018-19 as retailers push through some upstream cost increases.
Chart 1: Nominal and real Australian retail turnover
Despite the unemployment rate dropping to a 6 year low in July, real household income growth remains subdued. There is still a fair bit of slack in the labour market which will continue to limit wage growth through the rest of the year.
After a strong end to the 2017-18 financial year, spending growth set to moderate over the coming years. Spending ended the financial year strongly, rising 1.3% over the June quarter. Department store sales were particularly strong after a disappointing start to the year, growing 2.2% over the quarter. This pace of growth cannot be sustained given the pressure on household budgets, meaning slightly slower than previously expected growth over the coming years.
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