Budget May Not Impact Consumer Spending

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-Budget may not curtail spending at present
-Weather, Oz dollar have more impact
-Employment key and holding up
-Few signs of distress among retailers
 

By Eva Brocklehurst

It is widely accepted that the large fall in consumer sentiment after the May federal budget will translate to a decline in retail trade. Commonwealth Bank economists are not so sure this is a straightforward case. They expect retail spending growth, while below average, to be around 2.6% over 2014-15. Sure, anecdotes from retailers indicate the May retail numbers, due out on July 3, are likely to be weak, and the bank's economists are expecting a 0.2% fall. The reason for the softness, though, could more be a result of the unseasonably warm weather in May, reflected in falls in department stores and clothing, rather than any instant tightening of the purse strings after the budget.

The appreciation of the Australian dollar is also a negative input to retailing, as it encourages spending offshore via the internet or tourism channels. What the CBA economists suspect is that near-term retail trade will be little affected by the budget. The budget measures targeted at householders are back-end loaded and start on average from around 2016. Significantly, evidence suggests it is actual changes to disposable income that really drives changes in spending patterns. In this respect, wages growth may be subdued but the labour market has held up against expectations. The economists suspect the unemployment rate may have peaked at 6.0% in February and job fears are receding slowly as a result. A drop in fears over unemployment is an important offset to a fall in sentiment after the budget.

The momentum in retail trade has slowed in the past three months and some retailers have downgraded profit expectations. The economists note a build up of winter inventory ahead of the warmer-than-usual weather has been cited as one of the causes. Dissatisfaction with the budget has also been identified as an additional hindrance. Still, the economists maintain that consumer sentiment, historically, is a poor guide to near-term changes in retail trade, even though both measures tend to move in similar patterns as they are a reflection of the general economic environment. A return to average spending growth is one of the components of the expected switch to non-mining from mining sector growth. The economists believe the May retail numbers from the Australian Bureau of Statistics will provide the first look into whether spending was influenced by changes announced in the budget.

Credit Suisse has found few signs of distress from its monitoring of advertised prices across a selection of retailer websites. Normal discounting behaviour is in evidence among retailers of household goods and department stores. Subdued consumer confidence measures suggest relatively subdued spending in the short term and the analysts believe this presents some downside risk to the price and margin outlook. The analysts believe the risks will become clearer in subsequent weeks.

The analysts observe electronics goods prices in 2014 have so far not replicated the steep deflation seen last year. Electronics retailers are defending their margins and aggregate price increases have occurred across the retailers that were tracked. Gross margin expansion is either partly or completely offsetting weak volumes. Credit Suisse observes this is consistent with JB Hi-Fi's ((JBH)) mid June trading update, at which profit guidance was maintained despite sales revenue being materially weaker than previously indicated. Whether spending will pick up in the short term is unclear. If it does not, Credit Suisse envisages some risk of a damaging discounting phase. 

In white goods, pricing is marginally lower compared with overall price inflation in 2013. Heating products were discounted in early June following the steady inflation in prices in the lead up to winter. Credit Suisse believes the retailers were quick to discount as a result of the warm start to winter. With the exception of seasonal products, Credit Suisse notes pricing behaviour appears to be supporting margins.Department stores such as Myer ((MYR)) and David Jones ((DJS)) are conducting seasonal discounting consistent with 2013. It is unclear at this point whether this discounting reflects stock management or a lack of purchases. If it is the latter, Credit Suisse considers it likely the breadth or duration of the sales will extend beyond FY14. The analysts anticipate the discounting pattern over coming weeks will be informative in this regard.
 

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