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Retail Forecasts May 2014: Meeting the fiscal challenge


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16 June 2014:  After a torrid few years, retailers have enjoyed much improved trading conditions of late, spurred by low interest rates and a recovery in both house building and housing prices.  Overall retail turnover has increased in each of the 12 months to April.

Retail inflation has also picked up in the stronger spending environment, with some price increases stemming from the earlier fall in the $A.  That sees nominal sales growth over the year to April 2014 at 5.7% - the strongest result since the post-GFC cash handouts.

Against this backdrop, enter Joe Hockey and a plan to fix a Federal budget which remains in chronic deficit.  This belt tightening budget introduces a range of measures which will provide an additional challenge for retailers.  

The net impact of the Budget is that households will have around $10 billion less to spend by 2017-18 representing nearly 1% of household disposable income.  That will represent a modest detraction from retail and other components of consumer spending.  But note that the hit to income doesn’t come immediately – it is expected to be felt the hardest at the beginning of 2015-16 when GP co-payments and reductions to a range of family benefits commence.

The other key caveat to the tough budget message is that the Reserve Bank can essentially offset the impact of the Budget on incomes by leaving interest rates lower than they otherwise would have been; that is, by raising rates in 2015 rather than 2014.

That suggests the budget shouldn’t derail the consumer spending recovery.  But consumer confidence can also be fickle and post-budget readings have slumped.  On the view that consumers will respond to actual influences on their ability to spend rather than perceived ones, the budget shouldn’t stop 2014-15 from being a strong year for retail.

A return to a better rate of jobs growth, combined with current low interest rates, the benefits to Australian business of a lower $A, and the tail end of a house price surge all suggest 2014-15 may be a pretty good year for retail.

Overall, real (inflation-adjusted) retail sales growth is expected to show growth of 3.2% in 2013 14, and is then expected to move up to a cyclical peak of 3.6% in 2014-15, before moderating back to 2.4% sales growth in 2015-16.

By State, New South Wales has climbed its way to the top of the retail sales growth ladder over the past year.  Consumers have started to borrow money again, with much of that finance directed towards a hot housing market.  But retailers have also gained their fair share of NSW household income of late, producing the strongest retail results for NSW since 2009.  There has also been some support in terms of jobs growth, with NSW accounting for nearly half the additional jobs generated so far in 2014.  Victoria has also enjoyed some decent retail gains over the past year, based on low interest rates and improved consumer willingness to spend (though without the jobs growth).

Retail growth in Queensland and WA remains below the national average, as resource related investment peaks and cost cutting abounds.  However, both are still expected to be favoured over time by above average rates of population growth, which should also translate into better than average retail gains.

See Deloitte media releases and research at www.deloitte.com.au

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