Consumer terror

Retail sales for January are out and so are the spruikers. According to the SMH today:

Retail sales grew in January as consumers took heart from steady interest rates and a strong jobs market to increase their spending.

The volume of sales increased 0.4 per cent in January, up from 0.2 per cent in December, according to the Australian Bureau of Statistics. Economists had expected retail sales to rise by only 0.3 per cent in the month.

“Low unemployment and steady interest rates likely prompted higher (retail) spending in the month,” said Moody’s Food retailing rose by 2.5 per cent, while department stores sales increased 2.3 per cent, according to the ABS.

Household goods retailing sank 4.6 per cent in the month with clothing, footwear and personal accessories, all subject to competition from overseas companies on the internet, fell 2.5 per cent, the ABS said.

The Australian dollar firmed to $US1.0198 after the sales data were not as weak as some had bet on. Interbank futures held steady as the data did little to challenge expectations that interest rates are on hold for some months to come.

Sigh … what rot. Here’s a long term graph of retail sales:

Does that fall at the end look like consumers lighting cigars with $100 bills to you?

What is interesting to note is that as retail sales have increased their rate of growth over the years they have also become more volatile.  The period we’re currently wading through is most reminiscent of 2003/04 when housing last stalled. Going deeper, let’s check out the sub-sectors:

The three merchandise sectors look very gloomy. All three have flatlined since mid 2009. And it got worse in early 2010. Of the three, the only one that displays macro evidence for dollar-related falls is household goods, which stopped growing in 2007, when the dollar first challenged parity.

Let’s take a look at the supermarkets and eating out sectors:

Still growing but its a similar story. There’s a distinct flattening for supermarkets in mid 2009 and that sector is joined by eating out  in the first quarter of 2010.

So, let’s try to remember what happened back then…that’s right, this did:

Interest rates started to rise. There would also have been some effect from waning stimulus. That can’t explain the first quarter 2010 jolt, however, which was all rates and flatlined house prices.

The oft quoted cliche that monetary policy has a lag period of six months to work looks dead and gone. The lag period now looks compressed to about five seconds. Big debt and overinflated assets have consumers terrified of the RBA.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. The party’s over any everyone knows it. Asset prices and rampant consumer spending couldn’t keep going forever! Australia has a serious debt problem that needs to be addressed. But at the moment it’s not even being acknowledged. Why not ?

    Could it be that if we acknowledge the debt and the need to deal with it, we have to acknowledge its cause? And could it be that the cause is too unpalatable to reveal? Could it be that successive Australian governments, along with business, have been running a Ponzi scheme with our assets, our resources and our future ?

    No government wants economic growth to slow. Slow growth undermines the short-term share price of big business (and CEO remuneration), as well as the electoral performance of the government. So to facilitate growth, the Government turns a blind eye to the fact that a significant proportion of demand fuelling “growth” is debt driven; debt-financed demand has constituted around 20% of total demand in the Australian economy.

    The best way to keep growth on the up and up is to keep everyone spending and money cheap. Consumers are told that spending is the right thing to do by businesses that profit from consumer expenditure and by governments who bask in the glory of booming growth figures. The availability of cheap credit and consumer binges drives up prices, so more debt is needed to keep the spending going. People feel wealthier as their house prices have gone up and they have more stuff. They think their house will fund their retirement, so they are happy to spend more and save less.

    Everyone is happy – particularly business and government – so long as the spending binge continues – and money can be found to keep servicing the mountains of debt being accumulated.

    And therein lies the rub. How is all this debt to be financed !


    • Stingray, what interesting questions (to an interesting article) you’ve raised. I have worked in Market Research (more bending towards psychology and neurology of the consumer) and they claim when people spend money they do feel wealthier, or perceive themselves as wealthy. And sort of contrary to that, if they hit the shops and buy nothing, some people feel a little (to more) depressed about it. We’re not taught that whoever walks away from a deal with the money wins.

      Regarding the questions of debt you asked (rhetorically or not), I did a while ago read a book called “Maxed Out – Hard Times, Easy Credit” by James D. Scurlock. He pointed out the same thing, isn’t strange or funny how people will boast about, adulterous relationships, excessive drug and alcohol binges, puking on themselves, peeing and pooping their pants, unconscious from intoxication and photographed nude tied to a poll somewhere, … etc. But nobody talks about debt, like its’ the ultimate in personal and social shame.

      What a weird psychology there is to debt, real weird.

  2. yeh keep spending with debt its all well and said, but can any 1 tell me were the interest repayment comes from?? oooopps hahaha the sooner the liquidations happen the better, but australia is going to get ROCKED or the currency will be worth shit.