Retail Forecasts, May 2012 – Budget boostDOWNLOAD
14 June 2012: 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 sales shifted up in the March quarter by 1.8% in inflation-adjusted terms. Annual retail sales growth is now at its strongest since the end of 2009.
Food retailing now leads the charge in sales growth over the past year, ahead of the ‘other retailing’ group and cafes and restaurants. However, not all parts of retail are enjoying this improvement – sales from department stores and clothing retailers contracted over the year. And overall retail sales fell again in the month of April (down 0.2% in nominal terms).
Of course, the Reserve Bank has pushed down the official cash rate by a further 75 basis points over May and June, and markets have been betting on more rate cuts through the remainder of 2012. Those cuts will free up a substantial chunk of disposable income.
The current Federal 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. The Government cash splash is likely to boost retail in the short term, although some of these payments are effectively a one-off, while others will be offset by cost of living increases or increases in taxes or payments later on.
The global economic backdrop remains particularly challenging, which means that many households may take the opportunity to run down debt faster rather than spend the extra money in their pockets.
Overall, we expect that interest rate cuts and Budget handouts will help the retail sector continue some upward momentum in the coming months. Real wages growth is picking up, which may also help sustain retail growth at a reasonable level over 2012 and into 2013. Employment growth is expected to improve modestly in the next year, largely on the back of committed business investment projects.
But risks continue to remain high, particularly in relation to the global economy. Consumer and business sentiment is fragile, there are continued wealth losses as the share market and house prices head down, and the potential for renewed job losses through the broader economy if the global economy worsens.
By financial year, real (inflation-adjusted) retail sales growth in 2010-11 was just 0.7% (a two decade low). That is expected to rise to 2.0% growth in 2011-12, and continue up to 3.0% growth in 2012 13, supported by lower interest rates and spending of budget handouts.