Retail sales to pick up, but profit to be harder to come by

June 14, 2018

Retail turnover growth will remain moderate in the second half of 2018 before sales pick up next year because of better wage growth.

That’s the view of Deloitte Access Economics partner David Rumbens, who has forecast a modest lift in real retail turnover from 2.4 per cent in 2017/18 to 2.6 per cent in 2018-19.

Real retail turnover growth for the year to March was 2.6 per cent, meaning that growth is pegged to slow slightly in the second half of 2018 before strengthening as wage growth begins to pick up.

Economists believe an improvement in persistently low wage growth is on the horizon moving into next year as a tightening labour market begins to flow through to better spending outcomes.

That’s good news for the retailers, many of whom have been struggling to convince shoppers to release their purse strings.

“We’re expecting conditions to get more supportive for retailers over time,” Rumbens said.

Retail turnover has had a mixed start to 2018, March quarter sales rose just 0.6 per cent, slower than the prior quarter’s 1.1 per cent increase.

Monthly sales increase by a better than expected 0.4 per cent in April, but followed a flat result in March.

It is expected that stronger wage growth will coincide with a possible interest rate hike and a cooling housing market, which will shift spending growth drivers in the economy.

Reserve Bank of Australia Governor Phillip Lowe said on Wednesday that low wage growth was holding up a possible increase in the official cash rate.

“Whatever weight one places on these various factors constraining wages growth, it is clear that the slow growth in wages is affecting our economy,” Lowe said.

Rumbens said wage growth could increase from two to three per cent by the end of 2019, but while top line growth should become easier to come by, the increasingly competitive retail sector will make profit growth a harder task.

Rumbens said supply is slated to respond faster to an increase in demand than it has historically, as lower barriers to entry for online retail competitors ramp up pressure on existing players.

“The greater entry of overseas retailers and increasing penetration of online platforms has resulted in an abundance of choice for Australian consumers,” Rumbens said.

Deloitte has pegged sector wide profit margins in the 4.5 – 5 per cent range, but pressure varies from sector to sector, with household goods and fashion retail proving particularly competitive.

Online retail spending growth continues to outpace traditional bricks and mortar retail, but Deloitte said pureplay competition is heating up quickly, making brand a much more important part of e-commerce.

Its expected that high levels of competition will keep much of the sector in a state of price deflation for a while longer, which will make factors like differentiation and marketing more important for profitability.

Consumer confidence also rebounded this week after two-straight weeks of falls, according to the ANZ-Roy Morgan index.

Up 5.6 per cent to 123 points in the week to June, ANZ senior economist Joanne Masters said there were some encouraging signs in the economy.

“This jump in confidence likely reflects favourable coverage of the strong Q1 GDP result, which appears to have trumped concerns about the weakness in house prices and rising global trade tensions. The fall in petrol prices last week may also have boosted confidence,” she said.

Masters said that job growth figures slated to be released this week were expected to be strong, underpinning ongoing confidence.

“In the near term, we expect another strong jobs growth print later this week, which should act to consolidate this rise in consumer confidence,” she said.

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