Australia | Jul 07 2008
By Chris Shaw
The first half of 2008 has seen a rapid deterioration in the health of the Australian economy as the combination of higher interest rates, weakness in the US and ongoing volatility in the global economy has taken its toll, leading Westpac economists to forecast domestic demand growth will fall from 2007’s 5.9% to 3.4% this year and to just 1.8% in 2009.
This slowdown is readily apparent in consumer spending figures, as along with higher rates there is the twin impact of higher fuel and food costs for households to deal with. As a result the bank is forecasting a slowing in retail sales to just 2.3% this year and 2.4% next year, with risk firmly to the downside at present even allowing for tax cuts and a still solid labour market.
The bank’s senior economist Matthew Hassan points out the slowdown is not being felt evenly throughout the economy as the former boom mining states of Queensland and Western Australia are now finding it very tough, as evidenced by a fall in retail sales growth in the two states from 8% in the September quarter of last year to just 2.7% in the March quarter this year. This means the growth differential between the so-called mining states and the rest of the economy is narrowing.
As well Hassan notes different segments of the population are finding the going tougher, as those in the mortgage belt and those in the 25-44 age bracket are struggling at present but those aged 18-24, retirees and low income households are not feeling the same level of pressure at present.
No relief looks in sight in the shorter-term either in Hassan’s view as the news out of the US remains bad, the UK’s economy is not much better and the EU is under pressure given the hawkish approach being adopted by the European Central Bank. On the positive side of the ledger for Australia is the fact most Asian economies are faring better and as Asian growth levels should be maintainable there will continue to be strong demand for Australian commodity exports.
Away from the resources side of the economy it is the level of interest rates Hassan sees as having the most significant impact, making the point in each tightening cycle there is one increase that generates a much larger economic response than the others, with the March hike of 0.25% appearing to be the one this time around.
Since that increase Australia’s economic indicators have turned down far more sharply, with consumer sentiment slumping and households now winding back planned expenditure. Hassan’s view is consumer spending will slow, but a slump is unlikely as the economy should still experience a soft landing as inflation slowly returns to the Reserve Bank of Australia’s target range, which would then allow for an easing in interest rates.
As this plays out Hassan expects consumers to take a far more cautious approach, not least because higher fuel costs and weak housing and equity markets mean the rate of household wealth accumulation should slow from just over 12% last year to around 3% this year, meaning there remains downside risk to current growth and consumer demand expectations.
Given the lower expectations for consumers times are clearly getting tougher for retailers, a trend Hassan expects will continue as the profit cycle turns. He points out not only are the retailers dealing with weaker consumer spending at present but they are also being forced to deal with rising input costs, meaning the pricing power they enjoyed last year has quickly become a thing of the past.
While gains in the Australian dollar should help in a number of cases the key in Hassan’s view will be keeping labour costs under control, so those businesses with the flexibility to reduce labour costs in the face of lower demand should outperform, as should those able to tap into those pockets of the economy where consumer demand remains the strongest.