Higher rates dampen Christmas spending expectations

The exuberant consumer spending that powered a stellar company earnings season may have run out of puff, with retail analysts tipping the latest interest rate rise will prompt a slowdown in the lead-up to Christmas.

Reserve Bank governor Philip Lowe flagged in a speech last week that the pace of interest rate rises could soon slow, but the latest 50 basis point increase has already injected a hefty dose of caution on consumer outlook.

The business sector has paid a high price going into a third year now.Credit:Wayne Taylor

“Looking forward, we are becoming increasingly cautious on the consumer outlook, with savings rates falling, costs up and the full impact of rate hikes yet to hit household cash flow,” Jarden analyst Ben Gilbert and his team said.

Jarden’s monthly tracker of online retail suggests sales are slowing, with a median decline in web traffic of 16 per cent across the country’s major brands.

Meanwhile, the team at UBS note that the nation’s retail stocks were in a strong position leading in to reporting season, but the results on display were not enough to support a continued share price rally.

“Looking forward, rising cost of living is expected to weigh on sales growth from late CY22E, supply chain costs have started to fall, but recent rises will annualise in FY23E, and cost pressures across labour and rents are likely to remain challenges,” its analysts said in a note to clients last week.

Grocery wholesaler Metcash last week reported robust spending when it showed sales were up by 8.9 per cent across its group for the first weeks of 2023. The company flagged that inflation had played some part in those increased sales figures, while the future impacts of inflation on customers were not clear.

Macquarie has noted that it is currently tough to work out whether sales growth across the retail sector is coming from the price of goods sold or the volume of goods.

“Inflation remains elevated and is likely driving much of the growth we are seeing across the system,” Macquarie analysts said in a report last week.

“We think the latest increase in the cash rate to 2.35% will pinch household budgets as mortgage holders face increased repayments.”

The latest Deloitte Access economics retail forecast report suggests “cracks are starting to show” despite the nation’s spending spree, noting that overall retail price growth exceeded retail sales growth over the past two quarters.

“Once consumers’ pent-up demand runs through, the spending outlook is clouded by higher interest rates such that growth in consumer spending is expected to broadly rise in line with Australian GDP growth beyond 2022-23,” Deloitte said in its September report.

The ASX’s consumer discretionary stocks are down by 2.55 per cent over the past month, while staples have dropped by 4 per cent.

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