The link provides a presentation associated with a webinar we held. The recording is embedded in the email and details our revised forecasts for retail in the year head. We addressed the impact of higher interest rates, lower house prices and retail price inflation. All these factors will shape the timing and shape of a retail sales slowdown in FY27e. The presentation deck is now live on the website. 

The Australian retail sector is just commencing its slowdown, which will result in slower sales in FY27e. We forecast retail sales growth of 3.7% for FY27e, down from 5.0% achieved in FY26e. The slowdown is more dramatic in non-food retail and dining out. Both had above average growth in FY26e and will suffer weaker volumes as income growth slows and both house prices and housing churn weigh on retail sales. The weakness should become evident in the December 2026 quarter where households will see the lowest rate of income growth. Other factors that will impact retail include the inflation backdrop which will step-up more so in food categories. House price changes and the resulting wealth effect will also be a key swing factor over the next 12 months.

Since we last published our retail forecasts in January 2026, a lot has changed. Higher petrol prices and interest rates will lead to slower retail growth. We forecast retail sales growth of 4.0% for 2026, which is a revision down from 4.5% previously. On the surface it looks like a mild revision. However, the slowdown for non-food retail and dining out is larger at a one percentage point. Discretionary spending growth could slow by 3% by December 2026. The offsets to a more negative stance are higher inflation in food categories, unemployment remains low and households have savings buffers to deal with the pressures. There is a bear case where spending turns negative, but that requires recessionary conditions and an unsympathetic RBA and government.

In our view, the Australian retail sales cycle just passed its peak in the December 2025 quarter at 6% growth. We forecast retail sales growth of 4.5% in 2026. While a moderation from the recent peak, without further house price growth, households will be less willing to use their savings to drive retail spending. Our forecast of 4.5% growth is just below long-term trends. While interest rate movements will be topical, unless there are multiple rises, the shift in the Australian dollar and house prices will be more impactful on retail spending than any rate rise itself.

Australian retail sales growth has been on an improvement path since March 2024. Retail sales growth for FY25 was 3.3%, better than the 1.8% in FY24. We see retail spending accelerating further to 3.9% in FY26e. Why not a stronger improvement given interest rate cuts? Given tax cuts and strong wages growth during FY25, income growth will actually slow in FY26e making it hard to see much acceleration in retail sales. If retail growth is stronger than our forecast in FY26e, it is likely driven by households dipping into savings if house prices rise substantially.

The National Accounts results make for stimulating reading for consumer-facing businesses because household income growth has accelerated at the same time as cost of living pressures have eased. Financial conditions are good. The March 2025 quarter showed household income growth of 6.7% with consumer spending rising 4.2%. Households are now saving 5.2% of their income. The dilemma in our mind is whether conditions accelerate from here. We expect the rate of retail sales growth, currently trending at 4%, to persist over the next 12 months. While interest rate cuts will help, a slowdown in population and lapping the income tax cuts means income growth is actually likely to slow a little, making it hard to see an acceleration in retail sales growth.

Australian national accounts for the December 2024 quarter paint a clear picture on the drivers of a noticeable improvement in retail spending over that time period. Household income rose 5.6% with wages growth of 6.1%. Retail spending was up 4.0%. It appears close to half the tax cuts have been spent and non-retail spending is no longer crowding out spend. From here, sales growth should improve modestly as retail captures its fair share of the wallet. A slowdown in population growth of circa 0.5% needs to be taken into consideration as a partial offset and, along with low prevailing savings rate, informs our view that the retail upswing will be modest over the next 12 months.

Australian retail sales growth finished 2024 better than where it started, and the good news is we are likely to see a stronger growth rate for 2025. We forecast 3.6% retail sales growth this year, up from 2.6% in 2024. We see a stronger recovery in non-food retail, particularly household goods. While a good year, much of the support to spending comes from tax cuts and rate cuts, making it hard to see further gains beyond June 2026. Moreover, geopolitical risks (both positive and negative) feel larger this year. Both retailers and investors should have contingency plans.

Australia’s national accounts showed soft real GDP growth of 0.8% for the September 2024 quarter.  While household income growth was strong, consumer spending was softer. Year-on-year nominal consumer spending rose 4.1%, or 0.4% in real terms, which is below long-term trends. Households lifted their savings in the September quarter with more than half the tax cuts saved. While spending was soft, the strength of income growth and stored up savings make us positive that retail sales growth will continue improving from here.

We have updated our retail sales forecasts, which are modestly higher in FY25e and slightly lower in FY26e. We forecast FY25e retail sales growth of 3.2% (prev 2.9%) and the largest driver of our revisions is stronger non-food online sales growth. A retail recovery is underway, because this year has unquestionably strong household income growth, which sets a solid base for retail spending. However, households have a low savings rate, which detracts from the upswing. We expect a more notable pick up in household goods and online with softer sales in dining out for FY25e.