Edition Highlights: Retail Forecasts November 2018, Released 12 December 2018
Retailers are optimistic heading into the Christmas period after a relatively good year so far, both in terms of sales and profits. But it’s also been another year where spending growth has exceeded income growth, with the household savings rate falling sharply. That has been fine while property prices boomed, but with prices now falling, consumers are starting to run on empty.
Retail sales slowed in the September quarter, with real retail turnover expanding 2.4% year-on-year. While retailers have expressed a high degree of confidence heading into Christmas, there are some tricky transitions for the New Year. The drivers of spending are shifting from house prices towards wage growth, with spending moving away from consumer durables towards necessities. With the housing market in downswing, people are moving home less often and spending less on big ticket items. Labour income will need to keep rising to offset the drag to consumer spending from lower property prices.
Chart 1: Nominal and real Australian retail turnover
Source: ABS Cat 8501.0, Deloitte Access Economics
House price weakness is more significant than had previously expected in 2018, with national prices falling 2.7% over the year to October 2018. This is weighing on consumer sentiment and hurting wealth related sectors such as household goods sales. On a positive note, employment growth has outperformed initial expectations. Employment growth exceeded the 20 year average in October 2018, reaching 2.3% over the year. And more promising, the majority of the roles created in 2018 are in full-time positions.
For retail spending in 2018-19, the weakness in housing mostly is mostly offset by stronger employment growth. This has netted out in no change to our estimate of retail spending growth for this financial year, though income driven categories are looking stronger than wealth driven ones. Looking forward, 2019-20 will continue to benefit from stronger income growth providing a tailwind for spending activity. In addition, we expect most of the bad news on the house price front will have washed through by the end of 2018-19, with the market transitioning to a more stable outlook. This will result in stronger retail spending in 2019-20, with growth expected to pick up to 2.9%.
© 2018 Deloitte Touche Tohmatsu