Australian retail has had a challenging 12 months. We expect we are past the worst for this sales cycle with a gradual improvement in growth over the next 12 months. We forecast retail sales growth of 2.9% in FY25e, up from 1.8% in FY24e. The sectors likely to see the strongest recovery are household goods, supermarkets and online. Some categories are still vulnerable to a correction in volumes such as liquor, cafes & restaurants and fashion. While there is an upswing, it will be mild and leave growth rates below trend for the next three years in our view given the low household savings rate and decelerating population growth.

The Australian Federal Budget is positive for retail given income tax cuts. However, there are very few other initiatives that shift the outlook for consumer spending. Power price relief helps, but it is at the margin. The tax cuts add 1.6% to household income in FY25e. However, evidence from past tax cuts shows it takes time for them to benefit spending. Treasury forecasts a 1% acceleration in consumer spending for FY25e compared with FY24e. We take the same view on retail spending and expect a 1% improvement in growth for FY25e, a modest upswing. We are near the low point of the retail cycle and tax cuts will help lift growth. Even so, sales growth is likely to be slower than cost growth.