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Economic and Financial Market Update: Fire and ice - retails sales and the jobs market

03 February 2023

Summary:

The economy started to slow in the December quarter;
The jobs market is strong and will likely remain so for at least the first half of this year;
Inflation has peaked, but the key question is how quickly it will slow;
A quarter percentage point rate hike is likely in February.

The drop in December retail sales was surprising but there were reasons

Financial markets typically deal in either fire or ice. One moment it was the fire, with financial markets worried about inflation following the stronger than expected December quarter CPI figures. This, and then a dramatic drop in retail sales in December was highlighting a slowing economy. The truth (as is more often the case) is somewhere in between.

Take the retail sales number. At face value the headline number was poor (-3.9%). Abstracting from the pandemic period, you have to go back to the introduction of the GST in 2000 to find a bigger monthly decline. But, as with the introduction of the GST, there were non-economic reasons for the weakness. The big December rise followed a period of very strong rises. Retail sales growth in the year to December was still a strong 7.5%. The couple of weeks leading into the retail sale data release was characterised by upbeat retailor anecdotes.

A bigger issue is the seasonal-adjustment process. For obvious reasons, a large proportion of retail activity has historically happened in December. But that proportion has been declining in recent years reflecting the phenomena of Black Friday and Cyber Monday (occurring in November). And the seasonal-adjustment process has not caught up to this new pattern of sales.

Consumers are also continuing to move towards pre-COVID patterns. That is, spending away from goods and back towards services. In December while spending (not considering seasonal factors) declined for most categories it was broadly flat for spending in restaurants and cafes (and for food).