Australia | Apr 08 2009
By Chris Shaw
According to Westpac forecasts, the Australian economy this year will contract for the first time in 18 years, growth falling by around 1.0% before a modest recovery in 2010 to GDP growth of about 1.5%. The latter assumes the world economy emerges from recession in 2010 and that domestic monetary and fiscal policy stimulus measures prove effective.
The turnaround from several years of strong growth has had a major impact on the consumer sector of the economy as fears with respect to job security and household wealth have made consumers far more cautious than was the case for much of this decade.
The resulting change in consumer behaviour has seen attention turn to saving rather than spending, to the extent the bank’s senior economist Matthew Hassan forecasts consumer spending will grow at just 1.2% this year and by 2.0% in 2010, reflecting only a muted recovery as fear of job losses in particular gradually recedes.
Such a consumer spending outlook has implications for the retail sector, as Hassan notes food retail underperforms during a boom but outperforms in downturns. As evidence of this Hassan is forecasting combined food and fast food retail sales to grow at 1.1% this year and 2.8% in 2010, which is above his expectation for retail sales growth in general of 0.8% on average.
Driving this will be supermarkets, where sales growth is seen as continuing to grow at around 3.0% a year. Other categories such as liquor, takeaways and cafes and restaurants are more discretionary and therefore generate more cyclical growth, so recent underperformance is expected to continue in Hassan’s view.
On his numbers takeaway sales are forecast to decline by 3.0% this year, while cafes and restaurants are expected to see a 6.0% decline. While these sectors are typically among the first to bounce Hassan points out any recovery may be more muted this time around as high debt levels constrain consumer activity in the face of rising job losses.
With some fiscal stimulus having flowed through to consumers in recent months, Hassan has examined the impact it has had on consumer behaviour and to date he notes the results are not encouraging, as the response to date has been quite tepid.
While retail sales jumped in December by around 3.8% and this increase was sustained into January, Hassan sees the magnitude of the increase as disappointing given the scale of the fiscal stimulus offered by the government. As well, and of greater concern in Hassan’s view, is the fact there was little or no impact on spending outside of the retail sector and that much of the increase was absorbed by higher prices.
This implies consumption rose by just 0.1% and even if this figure proves incorrect Hassan notes it suggests the stimulus provided almost no boost to demand, meaning much of it went to household savings. In Hassan’s view the upcoming second round of fiscal stimulus is likely to follow a similar pattern, with as much as 80% of the boost likely being saved rather than spent.
While many of his assumptions may prove to be wide of the mark, Hassan takes the view the early signs of consumer response to fiscal stimulus are not encouraging. The boost to date has been far from enough to keep GDP in positive territory. There is one positive in Hassan’s view, this being consumers in Australia are now in better financial shape to cope with whatever future challenges emerge.