An anticipated rebound in retail sales has failed to materialise, putting more pressure on the struggling sector.

Key points: Retail sales shrank 0.3pc over the three months to September, the first quarterly retreat since 2012

Retail sales shrank 0.3pc over the three months to September, the first quarterly retreat since 2012 While volumes held up, heavy discounting saw prices fall 0.4pc over the quarter, to be down 0.3pc over the year.

While volumes held up, heavy discounting saw prices fall 0.4pc over the quarter, to be down 0.3pc over the year. Weakness was widespread, with WA and the NT the hardest hit

In seasonally adjusted terms, retail sales were flat in September.

The market had forecast a 0.4 per cent rebound, if for no other reason than savage 0.7 per cent fall in August — the largest decline recorded by the Australian Bureau of Statistics in almost five years.

By sector clothing, footwear and personal accessories experienced the largest retreat over the month (-0.7 per cent), while sales in household goods were also softer (-0.4 per cent).

There was better news for the beaten up department store sector with sales up a robust 2.1 per cent over the month.

However, overall the retail sector is suffering with the dollar value of sales down 0.3 per cent over the quarter with back-to-back contractions in July and August.

That is the first quarterly decline since 2012, and only the fourth since the global financial crisis set in.

The comparative strength in sales growth by the larger retailers may be an indication they are in a better position to cut prices in the very competitive environment.

Heavy discounting propped up sales

"The fact that real retail were broadly stable in the third quarter even though retailers offered more discounts than usual shows just how unwilling households are to take their wallets out of their pockets," Capital Economics' Paul Dales said.

"It was only because retailers decided to cut prices by 0.4 per cent that the volume of sales rose.

"In other words, retailers used discounts to entice shoppers to buy, but even then most stayed away or were content to just looking around."

Over the year retail prices are down 0.3 per cent.

Consumption could slip more

Mr Dales said a slowdown in consumption growth could be one of the unpleasant surprises of next year.

"Overall, these data show that the remarkable strength of jobs growth over the past year is not offsetting the downward pressure on household income from low wage growth, rising utility bills, high debt and stagnating house prices," he said.

ANZ's Jo Masters said the retail sector was clearly facing challenging times, with very weak growth in volumes and prices falling.

"The combination of international competition on prices and several headwinds hitting household balance sheets is proving a challenging mix," she said.

"It will be interesting to monitor spending on household items in coming months given a slowing housing market."

The September data also showed the weakness was broadly spread.

The populous states of New South Wales and Victoria continued to be soft, while Western Australia and the Northern Territory were dismal.