Retail rescue?

dollarAfter several years of deteriorating macroeconomic conditions, consensus is mounting that the subdued consumer fundamentals that have driven difficulties for retailers may be about to abate. 

As the labour market begins to tighten and predictions of a recovery in long-stagnant real wage growth pour in, traders are cautiously preparing for Australia’s economic engine to turn in favour of shoppers.

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It’s been a mixed first-half of the year for retail turnover, which sputtered with a mix of stronger results during February, April and May, while disappointing in January and March.

Month-on-month growth was relatively robust in May at 0.37 per cent, outpacing market expectations for the second month in a row. But year-on-year growth was weaker, up 2.49 per cent.

The figures drove optimism among economists that the sector had found its stride amid a boost in consumer confidence heading into winter, although July figures due this week will be crucial in ascertaining any sustained shift in fortunes.

National Australia Bank’s keenly watched retail barometer, the cashless retail sales index, has predicted strong June figures – outlining year-on-year gains across the board for the sector.

NAB chief economist Alan Oster believes month-on-month turnover growth in June will exceed may at 0.4 per cent, while year-on-year growth will rebound to 3.9 per cent.

A strong result in July, an important month on the retail calendar, will be a crucial test for the current health of the sector, particularly for the ability of traders to continue to entice shoppers with end-of-financial-year discounts, despite mounting promotional fatigue.

Moving into the second-half of 2018 it is expected that some semblance of real wage growth may come to the rescue for retailers.

Treasury reckons wage growth of two per cent is expected in 2017-18, increasing to 2.25 per cent in 2018-19 before increasing again to 3.25 per cent in 2019-20, where it is projected to stabilise over the remainder of the forward estimates.

Deloitte Access Economics partner David Rumbens is also of the view that wage growth will bring some relief to the retail sector in the coming months.

The latest CHEP retail index, which measures sales activity by measuring parcel movement, has forecast a 2.9 per cent increase in retail turnover [year-on-year] in June and a 3.9 per cent increase by August.

That’s a pretty sharp turnaround, but Rumbens, who worked on the numbers, said things are getting better.

“Retailers continue to face difficult conditions in 2018,” he said.

“We do expect wage growth to edge higher through the year as the labour market tightens a little, and stronger wages will be good news for retail spending, driving a modest but broad-based pick-up in spending power across the workforce.”

There are some issues though. Real wage growth ultimately the best measure of spending power remains elusive.

Inflation for the year to the end of the June quarter came in at 2.1 per cent, flattening an increase in the wage price index over the same period.

The headline inflation figure actually once again undershot market expectations, driving sentiment that the RBA will hold off on rate increases for some time yet.

AMP Capital chief economist Shane Oliver is of the view that an increase in the official cash rate from 1.5 per cent [a record low] is unlikely until 2020.

“Given the weakness in inflation, wages and the Sydney and Melbourne housing markets along with the uncertain outlook for consumer spending, the next move being a rate cut cannot be ruled out,” Oliver said last week.

 

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