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Retail Forecasts February 2012 – Walking the tightrope


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8 February 2012: Retailers are due for a break.  The last two years have been lean ones for the retail sector with sales growth of just 1.7% over 2010 and 2011 in real terms (after accounting for inflation).  That doesn’t even cover population growth over that time (of 3.0%), and is a long way short of expectations of ‘normal’ retail sales growth.

As a result the casualties are starting to mount with Borders, Angus & Robertson and Colorado in administration and Billabong closing stores.  Fierce competition from overseas online retailers is taking a degree of the spoils.  However, other key culprits are the slowdown in jobs growth, the trend move to a higher level of savings, and the trend towards services and non retail necessities (such as electricity) taking a greater slice of the consumer budget.

There is blue sky ahead, but the economy may need to walk a tightrope for retailers to get there.  Risks to the outlook include:

  • Global economic risks, particularly the risk of sovereign default or major banks failing in Europe.  While there remains a good chance that Europe will get through without such developments, downside risks are high.
  • Jobs growth.  Even if Europe holds together, credit constraints and sharper international competition has seen jobs growth (the backbone of retail sales growth), stumble of late.  It should resume but that will depend on credit conditions and business confidence.  
  • Consumer confidence needs to be shored up, having copped a barrage of negative headlines about the economy.  Otherwise, the savings rate may lift again.
  • The high $A is seen as contributing to the accelerating trend of shopping online from overseas retailers.  However, be careful what you wish for.  The higher $A has also lowered prices of imported stock for retailers here, and in doing so provided them with an opportunity to improve or support their margins.  A falling $A (which we do expect to see over the next three years) would put those margins under pressure.

Overall, Australian GDP growth over the next year is likely to be strong thanks to business investment, and retail growth will be particularly supported by real wage growth and a levelling out in the savings rate.

Interest rate cuts from the RBA remain in prospect (particularly if the European situation gets uglier).  Post GFC they were effective in helping retail, but deep cuts will only come in a renewed economic crisis – not something to be welcomed.

By financial year, real (inflation-adjusted) retail sales growth in 2010-11 was just 0.7% (a two decade low).  That may rise modestly to 1.2% growth in 2011-12, before an expected healthier growth rate of 2.6% in 2012-13 supported in part by lower interest rates.

On a State by State basis, retail sales growth over the past year is very much mirroring the broader economy.  The resource-driven jurisdictions of Western Australia, Northern Territory and Queensland are doing better than the national average (though Queensland only marginally so), while everyone else is doing worse.  The split may become more unbalanced before it gets better.

 

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