While the cost-of-living crisis continues, 2024 is shaping up to be a brighter year for retailers.
Deloitte Access Economics’ latest issue of Retail Forecasts reflects on a tough year for retailers and consumers in 2023. But the worst may be over, as retailers go into discounting overdrive to lift sales volumes.
The National Accounts data released today confirms that the Australian economy continued to grow in the September quarter, albeit at a very slow pace. Real GDP (seasonally adjusted) rose by just 0.2% in the September quarter. This subdued growth was largely driven by government consumption and capital investment.
Real quarterly household consumption remained was static in the quarter, despite continued population growth. Even this was only achieved because the household savings ratio dipped even further, falling to 1.1% in the September quarter (the lowest level seen since December 2007).
While the Australian economy has dodged an official recession in 2023, the retail sector did not. Despite this, after three consecutive quarters of retail decline, there was some reprieve – the September quarter brought the first positive change in real retail turnover since late 2022. Sales volumes rose by 0.2% on June quarter levels, thanks in part to retailers taking matters into their own hands with extensive discounting.
However, the cost-of-living crisis continues, and retailers are still experiencing the effects of a significant sales deficit over the past year. Stronger than expected inflation in the September quarter and the November cash rate lift have added further household financial stress. The struggles of 2023 have meant retail sales volumes are down 1.7% compared to a year ago, despite rapid population growth.
The current restrictions on consumer wallets have created nationwide hesitancy to spend on discretionary items to prioritise essential spending. Such consumer behaviour has led to a substantial gap between food and non-food retail sales growth in recent quarters. Over the year to September 2023, food sales in real terms have increased by 0.6%, while non food retail sales have declined by 4.2%. But now even food spending is starting to give way, as more consumers cut back on eating out and grocery shops to sustain other areas of spending.
Retailers are turning to the discounting tactic to lure consumers in the door. This has already been observed in the September quarter, with Department stores and Household goods (the two strongest sales categories) both seeing prices decline. Their price falls, 0.2% and 0.4% respectively, were well below overall CPI price growth of 1.2%, and food price growth of 0.9% in the September quarter. Retail price growth is expected to slow even further with big discounts over Black Friday.
While effective in the short-run, retailers cannot discount forever. The higher than normal levels of discounting have incentivised consumers to open up their wallets momentarily to clear out excess stock. Yet, with margins likely to have taken a hit, such tactics are not sustainable in the long run.
The good news is that the retailers may not have to rely on discounting for much longer. The business cycle is expected to turn in 2024, which is shaping up to be a brighter year for retailers. Consumer spending is expected to rise, thanks to real wage growth, strong population growth, as well an expected turn in the interest rate cycle. As a result, we expect real retail sales growth to rise steadily through the upcoming year: lifting from -0.9% in calendar year 2023 to 1.4% in 2024, and then on to 2.2% growth in 2025.
Chart: National real and nominal retail turnover
Source: Deloitte Access Economics, ABS 8501.0.
Download the executive summary of Retail Forecasts here.
This newsletter was distributed on 6th December 2023. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Sam Guthrie, Vacationer at Deloitte Access Economics.
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