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Retail implications of interest rate reductions & Budget measures

Deloitte Access Economics Weekly Economic Briefing, 14 May 2012

Retail sugar hit: Rate reductions & Budget measuresBelow is an extract from the Weekly Economic Briefing by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart, Deloitte's Chief Economist in the UK.

From their separate perspectives, sitting at opposite ‘corners’ of the globe they provide personal views on topical financial and economic issues.

Retail sugar hit

  • Australia’s retail sector has been struggling since the post-GFC cash handouts faded – the hit to consumer confidence, fears of job losses and a general need to cut back on consumer debt have all cut into the appetite of Australians for a trip to the shops.  However, a string of recent developments suggest that the gloom permeating shopping malls may be starting to lift
  • In the front line here are interest rate reductions, and it seems that the rate cuts made late last year have played a role in lifting spending in the early part of 2012.  Retail data for the month of March saw retail sales values leap 0.9%, pushing the growth rate over the year to a reasonable 3.7%.  Growth is strongest in WA (up more than 10%) and Queensland (around half that rate).  In volume terms (adjusted to price changes) growth in the past year of 2.9% is the strongest since the end of 2009 when much of the initial direct post GFC stimulus to the economy from the Government ended
  • Of course the Reserve Bank pushed down the official cash rate by a further 50 basis points at the start of May, with that effect still to flow through
  • The current Budget also included a number of measures (the sugar hit) that may help the retail sector – notably the payments for school age children and extra family welfare spending amounting to an additional $4.8 billion in welfare payments
  • Cuts to official interest rates have also come at a good time for retail, as it may take the pressure off many households that are struggling with mortgage stress.  However, like the extra money from the Federal Government, many households may take the opportunity to run down debt faster rather than spend the extra money in their pockets
  • While interest rate cuts add to disposable income and the ability to spend, the strong employment results announced last week add further to consumer confidence and the willingness to spend.  The strong results have probably lessened the chance of any further immediate cuts to official interest rates, although a stronger employment outlook (if sustained) is clearly a good development for retail
  • One of the additional concerns that the retail sector has faced in recent years has been the disappointing performance of Australia’s tourism sector, hit by falling global demand on the one hand, but also the high value of the Australia dollar that has tempted Australians to head overseas in greater numbers.  The chart below shows how the net balance of tourist arrivals and departures (shown in the green line) has turned against Australia since 2002
  • Such a trend would be a drag on retail as there are fewer people in the country at any given time.  Yet the concerns may be somewhat overdone – a deeper analysis of the data shows that overseas visits to Australia are tending to last increasingly longer than Australians’ trips overseas.  As a result, the actual number of Australians overseas at any point in time at present is very similar to the number of overseas visitors in Australia (the blue line).  That represents a deterioration from a decade ago, but the situation has been broadly stable over the last five years.

Chart 1.1: Tourist balance for Australia

Macro movements

  • Australia’s unemployment rate fell to 4.9% in April, the lowest rate for a year. Over the first four months of 2012 the economy added about 87,000 jobs, more than four times the corresponding figure for 2011. Of this, 72,000 have been part time jobs and 16,000 full time
  • The ABS recorded a trade deficit in March of $1.6 billion. Major key commodity exports continue to struggle, with the value of both coal and iron ore exports falling some 19% in the March quarter
  • Dwelling approvals rose 7.4% in March, well above market expectations which centred on around 3% growth.  But they remain 15% lower than a year ago and 30% lower than two years ago.  Nonetheless, lower mortgage rates should provide some support to approvals looking forward.

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