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Retail sales, job vacancies and interest rates

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2023-09-28

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Soft retail sales figures for August, along with a further decline in job vacancies in the three months leading up to the end of August, mean that the Reserve Bank will not raise interest rates at its October meeting. This is despite the enthusiastic claims made by some economists and business writers following the recent increase in the consumer price headline rate.

The vocal proponents of an interest rate hike argued that the rise in the headline rate to 5.2% (while overlooking or downplaying the softening in a core measure used by the Australian Bureau of Statistics) would increase pressure on the new governor at the RBA, Michelle Bullock. However, Thursday's data disproved these alarmist predictions, revealing that retail sales only rose by 0.2% (the market had expected a 0.3% rise). These figures, not adjusted for inflation and representing nominal movements, indicate a 2% or more decrease compared to the same time last year, with many areas of retail experiencing price inflation ranging from 5% to over 10%.

In fact, the nominal estimated value of sales in August at $35.432 billion remains nearly $400 million or over 1% below the peak figure of $25.828 billion recorded in November 2022, before adjusting for inflation. AMP's chief economist, Shane Oliver, highlighted the weakness in nominal sales growth (up only 1.5% from August 2022, while headline inflation was at 5.2%), suggesting that retail sales volumes are likely still declining despite rapid population growth. According to Oliver, "On our estimates, real retail sales are running down 2% from a year ago," and "retail sales per person are actually down 1% YoY, with real retail sales per person down around 4.5% YoY." The 0.2% rise in August followed a 0.5% rise in July but was preceded by a 0.8% fall in June, and since October/November the previous year, retail sales have essentially remained flat.

"Real retail sales in the September quarter are on track for their fourth consecutive quarterly decline, underscoring the pressure on households due to interest rate hikes and cost of living pressures."

Additionally, the other concerning data point is the latest job vacancies, which continue to slide. For the first time in over a year, there are now fewer vacancies than there are unemployed individuals.

In August 2023, there were 390,000 job vacancies, down by 38,000 from May, marking an 8.9% decrease. Vacancies are now 18% below their peak in May 2022, which was around 477,000.

According to Kate Lamb, the head of ABS’ labor statistics, "Job vacancies are still around 72 percent higher than they were in February 2020. That’s still around 160,000 more jobs that employers are looking for people to fill, as part of a pool of almost 400,000 vacancies." She also noted that "The percentage of businesses reporting at least one vacancy also fell from 25 percent in May to 22 percent in August. However, this was still double what it was in February 2020 at 11 percent."

Shane Oliver from AMP states that the decline in vacancies indicates "that the labor market is rapidly cooling." He further explains that "Leading labor market indicators, including job vacancies and job ads, and the ratio of job vacancies to unemployment are all deteriorating, pointing to a further cooling in the jobs market ahead."

He also suggests that this cooling trend should alleviate pressure on wage growth next year, although he acknowledges that near-term risks remain on the upside.

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