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 (largely separate) set of consumers they have been associated with a significant lift in debt commitments. In recent years both cohorts 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.
Retail sales weakened in 2018, with real retail turnover expanding 2.24% over the year. 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 to be more prudent with your cash. That leaves 2019 as retail’s gap year - nursing a hangover before getting ready to move ahead in a year’s time.
Why will 2020 retail sales be better? Primarily because the asset price trauma is expected to have largely worked through, which will leave labour income growth as the key underlying driver once again. There is upside pressure to 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 as we head into 2020.
Chart 1: Nominal and real Australian retail turnover
Source: ABS Cat 8501.0, Deloitte Access Economics
The Australian economy slowed more than expected in December, with quarterly growth of just 0.2%. Weakness in the housing market weighed heavily on construction activity, and consumption remained under pressure. The flow of weaker data leading up to the quarterly result prompted the Reserve Bank of Australia to moderate its stance on future monetary policy changes, indicating a rate hike was now just as likely as a rate cut. The central bank maintains its outlook for growth and inflation, but noted that this is dependent on the ongoing strength of the labour market. Although falling house prices are front and centre of the new, the Reserve Bank of Australia has highlighted that the biggest risk to the outlook is a weaker than expected labour market, especially on the wage and income fronts. Indeed, our analysis indicates that the impact of slower income growth on retail sales is twice as large as a similar slowdown in the housing market. With a subdued income outlook combined with the ongoing property market correction, it is unsurprising the outlook for retail spending is weak in 2019.
© 2018 Deloitte Touche Tohmatsu