Australia | Dec 13 2010
By Chris Shaw
In what is disappointing news for Australian retailers, a poor year in 2010 is unlikely to be saved by some Christmas cheer according to a review of the sector by Australian economic consultancy Access Economics.
The group's “Retail Forecasts, November 2010” analysis suggests while 2010 has seen solid underlying economic news in Australia, such as an upward trend in income growth and jobs growth of 3.4% over the past year, this has translated into only modest retail sales growth.
Much of the growth has been concentrated in the cafes and restaurants sector, as other elements of retail have in general struggled over the course of the year. This highlights what has been a patchy economic recovery overall.
Weak retail sales data in October showing a decline of 1.1% was enough to erase the gains of the previous three months and means sales growth for the year to October for Australia was just 2.2%. This is well below the 6% average growth rate for nominal sales recorded over the last decade.
For 2010 as a whole Access Economics expects food retailing to register nominal sales growth of 3.3%, department stores growth of 3.0%, clothing retailers 4.9% and household goods retailers just 2.3%.
The November rate hike by the Reserve Bank of Australia (RBA) and the subsequent increase in mortgage interest rates beyond this hike by the banking sector are acting as dampeners for the retail sector overall, as consumers remain unwilling to spend or are spending on items outside of the retail sector.
Consumers have also endured a difficult period for household wealth given the Australian sharemarket has registered relatively flat performance this year, while house prices have also levelled off over the past six months. Access Economics expects the rate hike won't help the housing sector as it is also likely to limit residential building activity, which will also become a problem for retailers.
There is some good news, as while Christmas is expected to deliver only modest sales growth for traditional retailers compared to last year, Access Economics expects some improvement for the sector in 2011.
Driving the improvement will be the strength of job gains in 2010, as Access Economics expects this will help narrow the gap between income growth and consumer spending growth. Purchases of retail items should also start accounting for a higher share of total consumer spending than is currently the case.
A stronger Australian dollar will also help according to the report, as not only may this lead to an increase in direct purchases from overseas, but it should also allow Australian retailers to expand margins. The Aussie has gained in part from stronger commodity prices, reflecting Australia's greater exposure to the faster growing emerging economies of Asia.
In the view of Access Economics, the surging Australian dollar is more likely to keep average retail price growth in check, rather than generating significant price falls. This is because while there is an inverse relationship between exchange rates and import prices, the relationship can be distorted by factors such as inflationary pressures in exporting countries and changing price levels of upstream materials.
As well, the Access Economics report notes for high exchange rates to show through on consumer prices there needs to be a functioning link between import prices of consumer goods and the final sale price of these goods.
A number of factors can weaken this relationship, such as a lack of competition in the retail market that allows for margins to be increased, any hedging of forex exposure by retailers or if a number of wholesale transactions are required to bring imported goods to the market.
In terms of forecasts, for the 2010/11 financial year Access Economics expects real retail sales growth of 3.2%, rising to an increase of 4.1% in 2011/12. Higher interest rates and a downturn in Australia's terms of trade should then see retail sales moderate, the group forecasting growth of 3.0% in 2012/13.
Over the past year it has been New South Wales and Victoria leading the way in terms of retail growth, but next year Access Economics expects job growth will favour Western Australia and Queensland as resource investment ramps up further. This implies the current two-track economy is expected to become more obvious in terms of retail sales performance over the next two years.
