Deloitte delivers a reality check.
Deloitte Access Economics’ quarterly retail forecasts released yesterday has predicted inflation-adjusted retail sales to rise by 2.4% in 2015-16 and 2.3% in fiscal 2017, compared with 3.3% in fiscal 2015 and 3.1% in 2014. This comes despite the best Christmas sales period since the global financial crisis.
Deloitte has warned retailers to prepare for at least two years of subdued sales growth as declining per capita incomes, softening house prices and weak commodity prices coincide with increased competition from global players.
Deloitte Partner David Rumbens said retail sales had performed well in 2015, but there were signs that demand was starting to taper off, pointing to weaker than expected retail sales growth in the months of December and January.
“We expect to see more of that in the next few months,” Rumbens said yesterday.
“The improved performance over the past year has been more driven by lower interest rates, rising house prices and a willingness to run down the rate of savings, which is a temporary rather than a sustained boost.
“If we get less of a boost from those channels then underlying income growth is relatively modest.”
While employment growth and consumer confidence had been holding up reasonably well, housing valuations were looking stretched and concerns about job security were growing.
Deloitte said these factors could limit further reductions in the household savings rate, which fell to 6.6% of income in the December 2015 quarter compared with 8.2% in the December quarter 2014, boosting discretionary spending.
Last week Citigroup, also warned that weak income growth could lead to slower retail sales growth.
Citigroup said discretionary retail spending rose 5.6% in the December quarter, the highest level of growth in eight years, even though income growth was only 3%, well below the 20-year trend of 6.1%.
“Consumers funded one-quarter of their retail growth over Christmas from savings,” Citigroup said. “The outlook for retail spending is clearly tied to the prospects for house price growth given the reliance on reduced savings.”
Deloitte Access Economics also warned about increased competition from global players – pointing to a recent report that found many international retailers had yet to enter Australia – and margin pressure from the weaker Australian dollar.
Rumbens said many retailers were reluctant to raise prices to recover higher cost of goods, even after a period of deflation in soft goods such as clothing and hardgoods such as consumer electronics.
“It’s definitely a competitive landscape,” he said.