Why July retail sales performance may be a one-off

Analysts say it could be due to tourist rebound when summer started.

After weak June performance, July retail sales -- both by value and volume – surprisingly rebound to 4.0%yoy and 4.6%yoy, respectively.

Although Jul’s tourist arrival figures are not out yet, Citi analysts suspect the better performance likely to be associated with the rebound of tourists during the start of the summer holidays. Judging by Mainland tourist’s preferred shopping list: (a) luxury items (jewellery and watches) jumped from -6.4%yoy in 1H to 14.1%yoy in Jul, and (b) medicine and cosmetics saw a 2.8%yoy growth in the month vs. 1.1% in 1H.

Consumer confidence retreated in 2Q17 despite steady wage growth (+3.7%yoy in 1Q17) support the view that local consumption are still very selective these days. Especially, big ticket item purchases remain lackluster in Jul, as sales of motor cars (-7.8%yoy), consumer durable goods (-0.6%yoy).

Here's more from Citi:

Supermarkets and food/alcoholic drinks/tobacco sales enjoy moderate growth.

It is also interesting that total receipts from the restaurants sector rose 4.0%yoy in 2Q17 (a separate data released on 2nd Aug, but this indicator also includes tourists’ dining). Together, these may suggest consumers are still generous in terms of spending on food & beverages, and dining out nowadays.

Retailers’ margins (our aggregate proxy by subtracting the growth of value by volume) have retreated back into negative since May17 and have been gradually worsening in the past three consecutive months, suggesting retailers have again engaged in discounts to lure sales.

July is the typical month of summer sales, and this would likely intensify into August. Specifically, retailer types that engaged in more notable negative margins (i.e. sharper discounts offered) this month are: clothing & footwear, furniture & fixing, department stores and luxury goods.

While we cheer to Jul’s higher than expected headline growths, we caution reading too much into one month’s print. We find the seasonally adjusted 3M over 3M trend more telling, as the series have been on a renewed declining trend since May17.

We read this as (1) retail sales posted some recovery earlier in the year (likely a combination of base effects and moderate tourists recovery after Mainland tourist group visa bans were imposed on Taiwan and Korea), but (2) sequential recovery is losing momentum, and (3) x near recovery potential of retail sales likely capped. Overall business environment for retailers likely still difficult, and this has an implication on the employment and wage growth (as retail sector accounts for 8.9% of total employment as of Jun17).