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Flooding rains to lengthen retail drought


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9 March 2011: The latest retail data confirms that Christmas 2010 was a poor one for retailers, failing to give the sector the spark it was desperately hoping for. Retail sales continue to grow at a sub-trend pace with consumers cautious about their spending.

Real retail sales growth over the year to December 2010 has come in at just 1.1%. Within that total, food retailing in particular is struggling with sales falling over the past year – the sector’s worst performance since the late 1980s. Non-food retailing is not faring a lot better as consumers use the opportunity to pay down their debts from boosts to income.

A key culprit is interest rates, which have now risen considerably from their emergency lows, taking away a chunk of disposable income. Another factor is that Australians are now on a savings bender. Scarred by the GFC, Australians are now a lot more cautious, with a large proportion of the boost to national income being saved instead of spent. Hence retail spending has been lacklustre at a time when income growth has been strong.

Australia’s recent spate of natural disasters are likely to lengthen the current retail drought:

  • Output losses from destroyed crops, lost mining production and stalled engineering construction will combine to produce weaker GDP growth for the March quarter of 2011. Those production losses also mean income losses and will further stall spending.
  •  Another short term impact of the natural disasters is that it is likely to reinforce the current consumer trend towards caution.
  • There will also be a one-off jump in fruit and vegetable prices resulting from the crop losses, taking away some consumer purchasing power. In setting interest rates, the Reserve Bank should look through that price spike, but there is a danger of stronger medium term wage pressure linked to the massive rebuilding task now underway. That is because it is coming at a time when engineering construction is already at record level. That wage pressure will keep upward pressure on interest rates.

We expect retail sales will continue to track slowly through the first half of 2011. Better news awaits from mid 2011 onwards. One can’t ignore the recent surge in Australia’s income, and we suspect that over time, very low rates of unemployment should help to loosen the purse strings of consumers.

So by the end of 2011 we expect to see retail sales tracking at a rate of 3% sales growth – still not great by historic standards but far more buoyant than the current retail environment.

Last Updated: 

Contacts

Name:
Vessa Playfair
Company:
Deloitte Australia
Job Title:
Head of Corporate Affairs
Phone:
Tel: +61 2 9322 7576, Mobile: +61 4 1926 7676
Email
vplayfair@deloitte.com.au
Name:
David Rumbens
Company:
Deloitte Access Economics
Job Title:
Partner
Phone:
Tel: +61 2 6175 2000, Mob: +61 4 3467 1039
Email
drumbens@deloitte.com.au

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