MORE BAD NEWS: Australian retail sales in shock contraction for December

• Australian retail sales fell heavily in December.

• The weakness was broad-based, and led by discretionary areas.

• Falls were led by New South Wales and Victoria, those states where home prices are currently falling the fastest.

• Retail sales volumes grew by just 0.1% during the December quarter. That was the second weak outcome in a row and points to the likelihood that broader household consumption was also soft late last year.

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Australia's retail sales fell heavily in December, rounding off what was another weak quarter of spending at the shops.

According to the Australian Bureau of Statistics (ABS), retail turnover tumbled by 0.4% after seasonal adjustments, missing expectations for an unchanged reading from a month earlier.

November's increase, originally reported at 0.4%, was revised up to show an larger gain of 0.5%, softening the big miss in December turnover. From a year earlier, sales rose by 2.75%, identical to the pace seen in the 12 months to November.

CBA senior economist Gareth Aird noted that weak data fit with other recent signs that domestic demand is falling in Australia. In a note to clients, said that, in summary, "the recent data flow relating to the consumer is concerning.

"Spending has slowed significantly and the latest read on consumer confidence suggests that concerns around the economic outlook for households have risen. While it is true that retail has been underperforming relative to the rest of the consumer basket for a while, it’s clear that the correction in dwelling prices is now spreading to the broader economy," Aird said.

Creating further downside risks for Australian Q4 GDP, quarterly retail sales volumes rose by just 0.1%, well below the 0.5% increase expected.

"Household goods (2.8%) and clothing and footwear (2.4%) led the falls after strong rises in November from Black Friday promotions," said Ben James, Director of Quarterly Economy Wide Surveys at the ABS.

"There were also falls in department stores (1.1%) and other retailers (0.1%)."

Those large declines were partially offset by a 0.5% increase in food sales, the largest category by dollar spend. Spending at cafes, restaurants and takeaway food outlets also rose strongly, lifting by 1.1% from a month earlier.

Excluding food sales, turnover was even weaker than the headline figure would suggest, falling by 1%, the largest drop since December 2017. Many regard non-food sales as a better indicator on discretionary spending patterns.

While reflective of the impact of Christmas spending being brought forward into November by Black Friday and Cyber Monday sales, that more than offset the 0.6% increase in non-food sales reported one month earlier.

From a year earlier, non-food sales rose by a paltry 1.9%, the same pace reported in November. Given Australia's population growth currently stands at 1.6% per annum, that suggest per capita discretionary spending barely increased over the year.

Adding to concerns about the impact of falling home prices in Sydney and Melbourne on household spending, the national decline was led by sizable falls in New South Wales and Victoria, their respective state capitals.

Sales in New South Wales slumped by 0.6%, the third large decline in the past four months. Turnover in Victoria also fell heavily, declining by 0.5% from a month earlier.

Sales also fell in all other states and territories except for Western Australian which recorded a modest gain of 0.1%. Declines ranged from 1.8% in the ACT to 0.1% in Queensland.

Quarterly retail sales volumes rose by just 0.1%, undershooting forecasts for an increase of 0.5%. That followed a weak 0.2% gain in the September quarter that heralded a sharp slowdown in broader household consumption.

"The quarterly rise in volumes was led by clothing and footwear (2.7%) and department stores (0.7%)," the ABS said.

Food retailing (0.2%), other retailing (0.5%), cafes, restaurants and takeaway food services (0.5%) and household goods (0.3%) fell in seasonally adjusted volume terms."

The increase in turnover will only marginally to Australian economic growth in the December quarter. As was the case in Q3, it may also signal that household consumption -- the largest part of the Australian economy at around 55% -- was equally as weak.

Other signs of weakness

The ABS data fits with a variety of alternate indicators that suggest household spending softened noticeably last year.

Credit card spending at retailers through the Commonwealth Bank's network fell sharply between November to early January compared to a year earlier. Consumer sentiment also fell to the weakest level in several years while activity levels at retailers slumped to levels not seen since 2012 in January.

The sharp slowdown in the December quarter also coincided with a noticeable acceleration in the pace of property price declines over the same period.

According to CoreLogic, Australia's median capital city home price fell by 1.3% in December, the largest monthly decline since 1983. That was followed up by a 1.2% drop in January that was once again led by falls in Sydney and Melbourne.

While the relatively new influence of Black Friday and Cyber Monday sales makes it difficult to assess monthly movements during this period of the year, the broader trend in turnover is clearly weakening, suggesting the impact of falling home prices on household balance sheets is now starting to influence consumer behaviour.

If that is the case, and with property prices still falling and expected to do so for some time, any subsequent slowdown in household spending will almost certainly weigh on broader economic growth.

"The data confirms that the strength seen in consumer in the first half of 2018 has definitely waned," said Sarah Hunter, Chief Australia Economist for BIS Oxford Economics.

"Households are being forced to curb growth in spending as a result of weak income growth, and confidence appears to have taken a battering from heightened volatility in financial markets and falling house prices.

"We expect momentum in household spending to remain subdued this year, with wages growth not expected to accelerate until 2020, and this will pull GDP growth down to around 2.5% this year and next."

Just three months ago, the Reserve Bank of Australia (RBA) forecast that Australian GDP would grow by 3.25% this year, helping to lower unemployment and boost wage and inflationary pressures as a consequence.

Based on the trends seen over the second half of the year, it's expectation that household consumption will continue to grow around 3% per annum is now looking increasingly optimistic.

The RBA will announce its February interest rate decision later today. While no change in the cash rate is expected, it will be hard for the bank to ignore the recent signals from the household sector.