Westpac Economics Team provides its first take on today's Australian retail sales, up 0.2% in May, which is judged as a disappointing result.

Key Quotes

Both Westpac and consensus had been for an moderately improved result given the RBA's surprise rate cut in May and an associated rally in consumer sentiment. The 0.2% gain along with a slightly weaker revised 0.1% gain in April and a poor 'mix' point to continued lacklustre demand most probably more aggressive price discounting among retailers.

Annual growth in retail sales slowed to 3.4%yr, with the monthly trend tracking a materially weaker 2.2% annual pace.

The store type category breakdown showed 'non-food' retail sales down 0.1%mth on a combined basis. Basic food retail sales rose 0.7%mth and 'cafes & restaurants' recorded a 0.3% gain. The gain in basic food may be a sign that the 'supermarket price wars' eased a touch in the month.

However, it the broader pattern of weakness in 'discretionary' categories and gains in 'staples' may also be a sign that Australian consumers are reining in spending. Notable within the non-food categories was a 1.1% fall in household goods retail - a bellwether discretionary category that, given links to housing construction, should instead be seeing decent growth at the moment.

The state split was particularly notable this month with the major non-mining states recording much better gains – NSW +0.7%mth, +4.9%yr; Vic +0.6%mth, +4.9%yr – and the mining states showing pronounced weakness – Qld –0.4%mth, +0.4%yr; WA –0.7%mth, +0.5%yr. The latter implies a material contraction in per capita sales over the last year.

Note that the retail survey has been a problematic indicator for broader consumer demand in recent years. Nevertheless, the May update still constitutes a disappointing read and points to downside risks both to consumer spending and price inflation.