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Retail Forecasts, August 2013 – On a wing and a prayer (and a housing recovery)


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11 September 2013: Monthly movements in retail sales have operated in a very volatile pattern so far in 2013.  After a very promising start to the year, with strong retail growth recorded over the March quarter, the equivalent June quarter sales results were tragic.  The July monthly results continued that trend of very weak growth.

The more recent weak sales results are in line with a raft of negative indicators on the Australian economy:

  • Australia’s unemployment rate has drifted up from 5.4% at the start of the year to 5.7%;
  • Federal Treasury have marked down Australia’s economic prospects in their latest statements (GDP growth forecasts for 2013-14 have moved from 2¾% in the Budget to 2½%);
  • the Reserve Bank have similarly marked down Australia’s economic prospects (and are doing something about it, moving the cash rate down to a record low of 2½%); and
  • global investors are marking down Australia’s economic prospects, sending the $A lower since May.

How is the economy going to deliver retail growth?

The housing sector is a key player in retail recovery hopes.  House prices are starting to lift, and typically when people are bidding up the price of housing they are also lifting their rate of retail spending.  With housing affordability much improved from two years ago, this channel may form a powerful driver.

Housing activity is also lifting, as it should be on the back of rising population growth, a period of underbuilding, and a powerful interest rate incentive.  That brings into play a lift in complementary retail spending.

We see these effects helping to lift retail growth over the next two years.  But the underlying economic environment will continue to struggle to achieve a lot in the way of jobs and income growth.

Real (inflation-adjusted) retail sales growth is expected to record a gain of 2.4% in 2013-14, but low interest rates and some modest improvement in the jobs outlook from a lower $A may see retail growth pick up to 3.6% in 2014-15.

The retail league table is starting to tighten up.  WA and Queensland are still leading (with the strongest retail performance over the year to June) but the margin is now a slim one, with no jurisdiction doing particularly well.  Low interest rates are going to deliver stronger benefits to NSW, Victoria and the ACT over the next year, giving retailers in those areas something to look forward to.  Abstracting from the economic cycle, WA and Queensland should still see the strongest average retail growth over time, supported by better rates of population growth.

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