Retail takes a gap year

According to Deloitte Access Economics’ latest quarterly Retail Forecasts subscriber report (Q1 2019) real retail turnover growth is expected to slip from 2.2% in calendar 2018 to a more modest 1.6% in 2019, before returning to 2.2% growth in 2020.

It follows weak sales in 2018 as housing market pressures and lacklustre income growth hurt household budgets. The willingness of households to forgo savings for spending will come under pressure as the housing market moderates and much of the retail pain will be felt in 2019, with a stronger outlook for 2020 as income growth strengthens and housing markets stabilise.

Deloitte Access Economics partner and Retail Forecasts principal author, David Rumbens said Australia’s retail sector has been sustaining a reasonable rate of sales growth in an unconventional way , not so much from income growth, but leveraging off consumers’ willingness to spend.

“That willingness to spend has been supported by very strong asset price growth, creating a massive windfall for one set of consumers. But for another, and largely separate group, they have been associated with a significant lift in debt commitments,” he said.

In recent years, both have run down their rate of savings from labour income, to support consumer spending at a faster pace of growth than it rightly should have achieved, given the economic fundamentals. Overall consumer spending growth over the past five years has averaged 2.5% per annum, but growth in household disposable income has only averaged 1.9%, Rumbens said.

“That difference is a fair chunk of change, and it’s fair to say that many retailers have only survived the last few years because we’ve lived beyond our means. But that ship has now sailed. Housing gains have dried up, and there are question marks over the sharemarket as well. Labour income growth is good, but not good enough yet to avoid some damage to retail growth in the absence of an excuse to run down savings further.”

And when overall net wealth is heading downwards, it provides a fairly strong incentive for people to be more prudent with their cash.

“That leaves 2019 as retail’s gap year , nursing a hangover before getting ready to move ahead in a year’s time.”

Rumbens said that, like all good gap years, retailers can use the opportunity to position themselves for recovery and success.

“It shouldn’t just be about survival. Retailers should ensure they are focused on competitive advantage, strengthening connections with customers and streamlining operations so that, when broader market growth does return, they are in the best possible position to take advantage of it.”

True for many taking a gap year, a well-timed windfall can be very helpful to get through. For retailers, it is likely to be the Federal Election delivering a sugar hit to help what would otherwise be a more constrained income environment.

“It does look like, the 2019-20 Budget is heading towards a surplus, but with the election only weeks away there are likely to be lots of raids from both sides of politics on a pretty modest pot. The government has already proposed personal income tax cuts. Beyond that there is speculation of straight cash handouts, mimicking the response to the GFC in 2008-09. Both of those avenues would translate very quickly into higher rates of retail and other consumer spending, and would no doubt be gratefully received by the sector.”

Rumbens said that with asset price trauma expected to have largely worked through the economy by 2020, labour income growthwill once again be a key underlying growth driver.

“There is upside pressure on wages, particularly in pockets of hot demand such as infrastructure and digital, and this is expected to continue building through 2019, providing a stronger platform for retail spending into 2020,” he said.

Tags: ,

Leave a Reply

Your email address will not be published. Required fields are marked *

*