Shoppers warming up

The medium term performance of the share market (ex-resources) depends heavily on household’s willingness to spend. The savings rate is rising as “disleveraging” occurs, but that is in the past. What maters for stocks is what will happen in the future and Royal Bank of Scotland is detecting some positive signs. Unlike America, where high unemployment and weak credit growth is likely to ensure weak demand for some time, Australia has strong employment. This is making RBS quite bullish about retail sales:

One of our core thematics for 2011 has revolved around strong household income growth, driven by wages and employment, and the translation of this into a pickup in consumer spending. Data this week not only confirms the income backdrop, but also shows evidence of gathering retail sales momentum.

Despite the headline, underlying strength in the 1Q data supports our major themes

One of our core themes for 2011 has revolved around a pickup in household income growth and the translation of this into higher spending, particularly given a more comfortable savings and net worth position. We look beyond the -1.2% quarterly print on GDP for 1Q11 and note that setting aside the -2.4ppt contribution from net exports, domestic final demand is running at +1.3% qoq and +3.3% yoy. Total compensation of employees rose 8.7% over the year, and this has facilitated a simultaneous pickup in consumption (to 5.9% yoy) and the savings rate (to 10.6% in 1Q11 from 8.4% a year prior).

Consumption growth has been coming through, but more so in services

Even the current level of consumption growth is under-appreciated by the market, in our view, given it has been concentrated in services (up 4.9% over the year to 1Q11) rather than retail (up only 2.5% over the same period). Household net worth has risen to a new high of A$4.6trn (or 5.8x household disposable income), and as such we don’t believe the savings rate will push much higher; instead consumption should grow in line with income.


The April retail sales data suggests consumer momentum is indeed building into the year. Nominal retail sales increased 1.1% over the month and more than 5% on a three-month annualised basis. Sales in furniture and houseware (+10%), clothing and footwear (+6%), and department store sales (+4%) all look strong on this same metric. We recommend an overweight position in the consumer discretionary sector, and our Model Portfolio includes potential beneficiaries of service-sector spending, such as Qantas and Macquarie Airports.

This is quite a different reading to some of the commentary on MacroBusiness. It is also quite a different reading to many brokers. A great deal depends on that net worth figure (5.8x household income), which in turn largely reflects the fate of the housing market, given that so much of the net worth is equity in houses.

This RBS report does suggest two points. One, the weakening of the wrong part of the two speed economy is not an absolute certainty. Australia is very different to America and Europe. Yes, we may have a property bubble. But in other respects the Australian economy is  comparatively strong.

Except, that is, in tourism, although its importance to the overall economy has shrunk:

Tourism in Australia spans several sectors in the economy and the Bureau of Statistics has published financial-year estimates of its output since the late 1990s.

Analysing these data, they show that tourism is a small part of the economy with its output of AUD34 billion last financial year accounting for only 2.6% of GDP. The peak in its share was 3.4% in 2000-01, which reflected the Sydney Olympics, and its importance was slowly waning before the resources boom kicked in.

This is not to say that tourism has contracted over time, but rather that its output has grown more slowly than the rest of the economy. That is, since the Olympics, nominal tourism output has grown at a compound rate of 3.8% per annum versus 6.8% compound growth in nominal GDP over the same period.

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  1. Devilled Advocate

    Now I’ve heard it all!

    I often wonder if the analysts who write these reports do much sanity checking of what the numbers say – ie a qualitative check?

    I invite them to go to any shopping centre/strip and ask 100 retailers how their business is travelling.

    I’d be surprised if 5% gave them a positive reading or said that they were growing.

    Everywhere I drive in Melbourne I see an increasing number of For Lease signs popping up – hardly signs of booming trade.

    Besides didn’t analysis show that the uptick was due to flood spending?
    Unless you are in “growth” sectors such as mining, caravans or online (largely offshore) I seriously doubt you are cracking a smile.

    Looking forward retail as we know it is going to have to completely reinvent itself – I think deleveraging has a long way to run yet as well as the “unwealth” effect and the internet elephant.

    When Coles is offering online ordering and delivery you know times are a changing.

    By way of disclosure until 2008 I was a manufacturer/wholesaler/retailer for 8 years selling to 300 stores and exporting to 14 countries and even back then you could see the writing on the wall – I’m kind of glad to be an employee.

    • Well said DA!

      “…I was a manufacturer/wholesaler/retailer for 8 years selling to 300 stores…”

      I wonder if we ever crossed paths as I am also a manufacturer/wholesaler to the retail market?

      I began my business in a recession back in 1991 and to be quite honest I’ve never seen business drop off so quickly since the beginning of this year.

      I had coffee last week with the Director of one of the largest commercial property managers in Sydney who basically conveyed the commercial real estate sector is DEAD. The only sector showing any signs of a heartbeat is the construction of new and large distribution hubs by/for the major retailers in the outer west.

      • Devilled Advocate

        Who knows Nod – probably, the world is a small (and getting smaller) place.

        I was in a niche market and managed to dominate it quite quickly and had the number 1 and 2 selling brands which allowed us to get into export very quickly as well.

        We werent a big business – 9 staff but I enjoyed 90% of the 8 years I ran it for.

        I do worry about the vulnerability of the Australian economy to a major external shock – we have very few non mining global companies that will sustain us long term and I think this is a major shortcoming of the last few governments.

        Frankly it really frightens me that every man and his dog is a property mogul – we dont make a better country by exchanging property contracts with each other as Ireland, Iceland, Spain and the US have shown.

        What happens when the music stops?

        Im glad I sold out, it was time (in retrospect), I got an incredible offer for our brands.

        One day I will start another business but will do things very efficiently leveraging IT wherever and whenever I can – this is the future.


  2. I view RBS like GS or JPM, and I can’t take them seriously in a changing economic world. If they are talking it up they are defending a position.

    Again, they never saw the GFC coming, and little structural changes make the global economy better, and if fact it’s worse.

    Australia might be different to the USA and Europe, but global shocks effect every economy in most cases. If credit does stall, as I think it’s showing signs of now, that has a big impact.

    • I agree in not taking them seriously, but given the strength of the Australian economy relative to the rest of the world after post GFC, I think there is a case to be made for a sort of pent up demand amongst consumers.

      At some point, savings start to burn a hole in some consumers pockets. Bar another GFC type event which could seriously damage the wealth effect, I see an uptick in consumer spending as quite plausible. (despite my cynical view of any report from RBS, JPM etc…)

      That’s not to say a return to pre GFC levels are on the cards, but maybe a bounce from a low base?

      • I once again have to question two things about these types of analysis.

        1 ) Their continuing argument that wages are rising, yet neglect to analyse the real costs of living and the price of debt for those earning those wages.

        2) Their lack of analysis of WHO owns these growing savings. If it is boomers ( cashing out of equities and housing as they retire), as I have suggested it could be in the past, then these people are certainly not about to rush out and consume.

        and let’s just all forget about Australia’s private sector debt ratios while we’re at it.

        • I meet with two high profile business guys today in Melbourne. One is in building, and the other retail, and they both said things are slowing down. The builder says he’s struggling to build to a dropping sales price, and the retailer said sales are way down.

          Privately, I mix with some quite well off and not so, and most say they are under price pressures.

          I totally agree with you on your points.

          No one wants a slow down, but if you’re not looking at the signals here and globally you might be sorry later and that is my position. When I see real upturns I’ll jump from cash into revenue and growth stocks. Until then I’m realistic, and am happy to grow my research.

        • ie. distribution, distribution, distribution, please!

          Music to my ears!

          I am respecting point values less with each week…more and more useless as an accurate indicator(s) as time goes on…

  3. Maybe it is just me but I want to spend. The problem is a lot of shops are shovelling crap product.

    I’m not a shopper that spends $200 to fill a carrier bag every week and burrow it away. However, I may spend $1000 in one go for the right thing.

    That said, a lot of brands carrying the high quality, big ticket prices come from overseas so does Australia really benefit?

  4. Huh? the saving rate is going up, so does that mean the money supply is contracting?
    How does this improve spending or am I missing something.

  5. I work in the Adelaide CBD and often trek through major department stores as a short cut to favourite cafes. For several weeks the Myer centre was like a morgue. Quite disheartening.
    In the last two days there have been significantly more people shopping. Same at DJs. Can’t work it out. It is not the weather or sales or new season fashions.

    I think people like to or want to save but then they also want to spend. I suppose a lot of merchandise becomes redundant in short time these days so we can only delay spending for so long.

    I know this is not a hard analysis and interpretation of data but it was an observation that made me stop and think.

    • Easy, IMHO: micro-cycles.

      People save a lot, spend a bit, save a fair bit more, spend a little bit less than what they just saved.

      So, it’s not a matter of whether there are ups and downs – and this should be expected for anything – but where the macro-trend is headed: up, flat, or down?

      In this case, the macro-trend (at least for the medium term) seems to be up for savings, down for debt…etc….

  6. SON
    One thimg you forgot. People are only now getting their money from insurance companies. The retail increase may only last another month.

    On the other hand my business (discount retailing) had a 20% + increase in the last 3 weeks. My customers are now more interested in quality AND value. The only thing I can say is things are changing quickly. I think we will know in 3 months time if you are right.