After a tough end to 2018, so far in 2019 retailers have faced yet another period of weak demand, with wage growth stagnating and house prices on the decline. However, it may not be all doom and gloom for the sector, with some very much needed relief coming in the second half of the year. For the first time in over a decade, both fiscal and monetary stimulus is on its way. Households will be facing lower interest rate costs just as the government hands out cash in the form of tax rebates.
Retail sales started 2019 on soft footing, with real retail turnover rising just 1.1% over the year to March. Worryingly, retail turnover fell over the March quarter, the first decline in over five years. Despite steady employment growth, household finances have come under pressure from stagnant wage growth and declining wealth. This has hurt consumer sentiment and weighed on willingness to spend. Given the discretionary nature of retail spending, this has hit the sector hard, with retail growth expected to slow from 2.2% in 2018 to just 1.5% in 2019.
However, there is some good news ahead for retailers – households are expected to come into some extra cash in the new financial year and retailers are likely to benefit. Usually tax cuts result in a marginally higher take home pay packet, supporting a gradual and ongoing increase in consumption. The difference this time around is that the tax policy changes will be putting cold hard cash in the hands of consumers after lodging their returns. And there is further good news for retailers. Once the election sugar hit fades, underlying drivers of consumer spending are likely to have improved, supported by the recent rate cut. This positive momentum in the back of 2019 is expected to continue into the following year, supporting a 2.9% rise in retail spending in 2020.
Chart 1: Nominal and real Australian retail turnover
Source: ABS Cat 8501.0, Deloitte Access Economics
The biggest change in underlying drivers of spending since the last release is the Reserve Bank of Australia’s recent rate cut. With ongoing weakness in inflation, falling house prices, and now some initial signs of weakness in the labour market, the central bank was prompted to ease monetary settings to support the economy. This is welcome news for retailers. The rate cut is likely to ease financial pressures on households and potentially limit the decline in house prices, which were two factors limiting spending activity.
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