Australia | Jul 16 2010
By Chris Shaw
The fiscal stimulus delivered in early 2009 meant a jump in retail sales growth in Australia, but as Commonwealth Bank notes sales growth has since weakened as the stimulus measures have faded. Discretionary spending such as retailing categories appear to have suffered the most, with nominal spending appearing to have been restricted to sectors such as food, cafes, restaurants and takeaways.
This trend may be set to shift according to CBA economist James McIntyre, who notes retail sales growth has actually strengthened over the past three months and is now growing at an annualised pace of 6.4%. Total household consumption is also improving, having grown at 3.1% in annual terms in the first quarter of 2010.
In McIntyre's view, further improvement in these measures is expected from here as other economic data offer a supportive environment. Strong growth in the Australian labour market is one such variable, as it shows hours worked, wages and household wealth are all improving.
As McIntyre points out, over the past year employment has grown by 353,000 jobs, most of the increase coming in full-time positions. Hours worked rose 1.3% in the June quarter, which has added markedly to household income growth. Gross household incomes are estimated to have risen by 3.4% over the past six months.
This suggests household spending capacity is improving rapidly and in McIntyre's view the improvement is enough that there will begin to be a flow through to improvements in spending outcomes. The Reserve Bank of Australia has estimated that gains in wealth translate to additional spending at the rate of 3c for every dollar of wealth gain.
The combination of improving employment, consumer confidence and asset prices leads McIntyre to suggest the process of household balance sheet repair that was a focus following the onset of the Global Financial Crisis has largely been completed.
There is also evidence in support of this view, as McIntyre notes the household debt to income ratio rose to a record high in the first quarter of this year and housing credit continues to expand at a solid pace.
The other factor in favour of an improvement in consumer spending is strong population growth, as McIntyre expects above average population growth will continue for the next few years. This is because the relative strength of the Australian economy is a drawcard for migrants, while the large number of mineral and energy projects under construction will require a high level of skilled migration.
If this is not the case there is scope for higher inflation or larger labour constraints in McIntyre's view, as different industries compete for workers and so push up wages.
The strong Australian economic outlook does have some risks, McIntyre noting while confidence is improving it remains somewhat fragile. The mix of rising interest rates relative to incomes will be a key variable. Were growth in incomes to fall short of what is required to offset higher interest costs, spending growth would be likely to suffer.
McIntyre is forecasting Australian interest rates rise from a current cash rate of 4.5% to 5.00% by the end of thus year and to 6.00% by the end of 2011, so incomes need to keep pace with this rate of growth.
Another constraint is rising rents, as the strength in Australia's population growth means there is a shortage of available housing in the country at present. This is pushing up the price of housing for both buyers and renters, while both groups will also need deal with expected rises in electricity, gas, water, sewerage and transport costs. This suggests any threat to income growth could impact on potential spending capacity in McIntyre's view.
In terms of the outlook for the retail sector specifically, McIntyre notes spending patterns changed during the downturn and retail sales growth weakened considerably. Sales volumes rose just 2.3% for the 12 months to the end of March, which compared to a 9.4% increase in spending on the purchase of motor vehicles.
Weak retail inflation is impacting on nominal sales growth in McIntyre's view, as while trade volumes are growing solidly price weakness is holding back sales values. While retail inflation is likely to remain weak until early next year, McIntye expects stronger rises through the course of both 2011 and 2012.
This underpins his forecasts for household consumption expenditure growth of 2.7% in 2009/10, 3.4% in 2010/11 and 3.8% in 2011/12. This should equate to sales growth in nominal retail sales terms rising to 6.0-6.5% over the course of 2010-2012.
