Sales also eased in Victoria, by 0.5 per cent, Queensland (0.1 per cent), the ACT (1.8 per cent), South Australia (0.3 per cent), Tasmania (0.2 per cent) and the Northern Territory (0.3 per cent).
Analysts had been prepared for a weak December after anecdotal evidence pointed to consumers winding back their spending plans from late November.
Not only were sales down but the volume of goods sold were well short of expectations. Through the December quarter, retail volumes rose by 0.1 per cent, pointing to a weak contribution from households in the looming national accounts.
There are signs the fall in Sydney house prices is feeding into the weak retail sector.
Retail spending across NSW has decelerated in line with deepening house price falls. Spending on household goods dropped by 1.9 per cent over the year, but since June the fall has been 3.7 per cent.
It’s a similar story in Victoria. Total sales across the state increased by 4.4 per cent through the year but since June they have been up by just 1 per cent.
Outside the family home, the biggest expenditure for households is a new car.
The Federal Chamber of Automotive Industries reported 81,994 cars were sold in January, a 7.4 per cent drop on the same month last year.
Over the past six months, sales have edged down by 7 per cent compared to the same six month period in 2017.
Chamber chief executive officer Tony Weber said the drop in sales was largely due to ebbing consumer confidence.
«The current economic environment is a challenging one, with an imminent federal election, a declining real estate market and tighter lending practices,» he said.
Further adding to the concerns about the economy, the nation’s trade surplus in December grew to $3.7 billion due to a sharp fall in imports of capital and consumer goods.
Despite the surplus, net exports are now tipped to subtract 0.3 percentage points from the national accounts due in the first week of March.
This is on top of figures released earlier in the week showing job advertisements deteriorating and a sharp fall in building approvals across the country.
All would have to be factored into the federal budget, to be released on April 2, that the government maintains will forecast the first surplus in a decade.
Following its first meeting of the year, the Reserve Bank board held official interest rates at 1.5 per cent where they have been since August 2016.
Board governor Philip Lowe, who is due to give a speech on Wednesday on the future of the economy, revealed the RBA now believed the economy would grow «about 3 per cent» this year and a little slower in 2020. The bank had forecast growth of 3.5 per cent in 2019.
The bank has been expecting a lift in underlying inflation, but Dr Lowe said this was now «likely to be gradual and to take a little longer than earlier expected».
Another issue of growing importance for the RBA is the impact of the property market.
«The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities,» he said.
Commonwealth Bank senior economist Kristina Clifton said Dr Lowe’s commentary suggested anyone looking for a change in interest rates would be disappointed.
«With dwelling prices falling and consumer spending slowing, it’s looking likely that the RBA will sit on the sidelines for quite a while yet,» she said.
«We think a rate cut would require a deterioration in the labour market and that is not what we or the RBA are expecting.»
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.