Don’t mention the savings

Two senior Australian business and economics commentators today make throwaway arguments about the struggles of the retail sector. First, it’s Alan Kohler, who dedicates his column to explaining how retail is suffering from Dutch disease. His argument is as follows:

Retailing is the bedrock of the economy, employing about 1.3 million people directly and touching millions of other lives through wholesaling, transport, manufacturing and farming.

The central paradox of the Australian economy is that even though national income is booming because of the commodities boom, retailing is close to, or in, recession. Retailing is only supposed to benefit from rising income.

It is the key reason, in my view, why the Gillard government is making such heavy weather of the carbon tax, why business and consumer confidence is so soft despite very low unemployment, and why business people generally are more at odds with the government than at any time since the Whitlam years.

Dutch disease is only meant to affect manufacturing and tourism. It happens when a nation’s currency rises as a result of a terms of trade boom that is caused by rising prices for one or more commodities – hurting other exporters.

The term Dutch disease was apparently coined in 1977 byThe Economist to describe what happened to the manufacturing sector of The Netherlands after the discovery of a large natural gas field in 1959.

In the classic economic modelling subsequently developed in the 1980s, the non-traded goods sectors such as services and retailing remain unaffected while in the traded goods sectors of the economy there are wildly different experiences.

The parts that are experiencing a price boom – in our case iron ore, coal and gold – do very well even though the currency rises, while manufacturing, tourism and agriculture suffer.

However there has been a dramatic change to this scenario in the modern era: retailing has been moved into the traded goods part of the economy by the internet.

Everywhere I go people talk about the amount of shopping they are now doing online. It’s not because it’s necessarily more convenient; in fact, you usually have to wait for the product, you can’t try it on and you can’t get to know the shopkeeper.

It’s because the stuff is so cheap thanks to the high Australian dollar. More and more people I bump into speak in wonderment about the deals they are getting from overseas websites. Products, especially clothes, are less than half the price in Australian stores, it takes just few days to get here and usually includes free postage.

We’ve already seen this phenomenon devastate the bookstores with the closure of Borders and Angus and Robertson; now it’s moving to clothing and footwear and a wide range of other products.

No doubt, Kohler’s argument has some merit. There’s clearly been a rise in online purchasing. But  can we provide some more evidence than the “people I bump into”?

For instance, look at this recent chart posted at MB by Cameron Murray of real retail sales in the past forty years:

So far as I can tell, nothing in this chart supports Kohler’s argument. First, for forty years, household goods is the great standout for growth and the recent stalling and it’s not very exposed to the internet. Second, clothing and accessories are actually doing pretty well relative to other retail sectors. Third, department store sales flatlined around 2003, long before the dollar reached current levels but well and truly around the time that speciality retailing chains started eating them for breakfast. Fourth, food retailing, which is Kohler’s primary example of a non-tradable retail sector, has suffered just as much as all others and worse than some. Fifth, cafe’s and restaurants have also flatlined since 2007. Can you order a cappuccino over the net now?

Kohler doesn’t mention the rising savings rate, nor falling asset prices, which do explain the trends in this chart neatly.

Next up is Gittins!, who is equally at sea when explaining current consumer trends:

Though the likelihood is that hysteria over the imminent devastation to be wrought by the carbon tax accounts for the greatest part of the present caution among consumers, vague anxiety over the incomprehensible goings on in Greece is probably also contributing.

There is at least some evidence  for this contention (though Gittins! doesn’t provide it), with tax anxiety showing up as significant in the Westpac/Melbourne Institute Consumer Confidence survey since the start of the year.

But such influences as policy shifts tend to be ephemeral in their effects. And a quick glance at the above chart shows that retail sales flatlined in 2007 as credit in the shadow banks suddenly froze and the world began to contemplate a GFC.

That’s not so say that the carbon tax is having no effect, nor offshore trials. But the trend is clearly larger and more entrenched than either.

I have no idea why these grey beards of Australian economic commentary are so at sea in explaining the new trend in retail. Perhaps their experience is the problem. After many years of watching the economy tick along in a certain way, they seem unable to explain a paradigm shift when they see it.

Certainly, youth is on the side of  Jessica Irvine of the SMH, who penned a far better analysis of the new normal for retail last week:

A golden age for Australian retailers is over. Gone. Finished. Retailers offer plenty of short-term scapegoats for their current woes: the carbon tax, the flood levy, the higher Australian dollar, higher interest rates. But, in reality, the current downturn in retail spending is much more deeply rooted and structural than that.

Australian households have now completed an historic and one-off adjustment to the halving of mortgage rates during the 1990s. For households, this halving in borrowing costs, along with looser lending standards, allowed them to simply borrow twice as much. And borrow we did. For much of the early 2000s, every weekend was greeted as an opportunity to rush down to the local homemaker centre to load up cars and then houses with the latest leather lounge suite, plasma TV or other gizmo. Why? Because we could. Retail sales grew by about 8 per cent a year, well above what could be sustained by wages growth of about 4 or 5 per cent. The rest was debt.

The household savings drive that is so confounding retailers today, really began with that first stimulus cheque in late 2008. And households haven’t stopped saving. National accounts show households, instead of spending more than they earn as they did before the crisis, now save about 10 cents in every dollar they earn, and have been doing so since late 2008.

The global financial crisis provided households with both the means to save – lower interest rates and cash handouts – and the motivation. Households could only stand by and watch as their share and superannuation portfolios crashed. It helped them realise they couldn’t just rely on debt-funded asset price gains to build wealth. If they wanted to build wealth, they’d have to do it the hard way, by saving.


Houses and Holes
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  1. Retailers like Hardly Normal have to start seeing their shops as little more than museums or exhibition halls. Folks enter to check out the goods then go home and order over the Internet.
    The first ones to realise this will react by installing an internet cafe. There’s money to be made out of selling coffee!

    • Fun to wathc so many “buyers” at HN checking their Iphone while “shopping”/”negotiating”

      too easy

    • Bingo.

      Gerry Harvey hasn’t quite cottoned on that the retail industry has now moved from non-tradable to tradable.

  2. A lot of people will go online to search for information before buying a ‘big ticket’ item. Most searches will direct them to a US site, and this is where the high Australia dollar comes in. Even if the person does not order it from overseas, they will refrain from buying the item locally because the Aussie price looks like a ripoff.

  3. The only ,Fawlty Towers,I can see are ..Gittins and Kohler…
    Nothing new for a Monday is it..
    Thanks H&H…JR

  4. FWIW, I think its a bit of both that’s hitting retail. Both the end of easy credit, and the structural change to Quarry Australia (high dollar, Dutch Disease etc). If the dollar was to fall sharply, online shopping would instantly become less attractive.

    What’s certain is Gittins! doesn’t get it at all. He’s still fantasising about the riches about to be bestowed on all of us from the mining boom…

    The truth is that despite all the self-pitying, over-hyped gloom, the Reserve retains a ”bias to tighten” – its expectation that sooner or later it will need to raise interest rates, not cut them.

    Why? Because we’re in the middle of the biggest commodity boom, and the early stages of the biggest mining construction boom, we’ve experienced in 140 years. And because it’s delusional to imagine all the benefit from that boom is penned up in Western Australia.

    Ross, we’ve been lectured for years now about the rivers of gold about to start flowing through the wider economy, and it still hasn’t happened. The fact is, mining and related industries employ less than 10% of the workforce, and the strong dollar (you so loudly cheered earlier this year) has delivered significant downsides

    I agree with commenter “Frank” who repeatedly posts this comment at Fairfax:

    “Mining boom”?, that borders on propaganda.

    • Lorax – I’m in resources, I’m in Western Australia and this is a ‘boom’. Perhaps you would prefer ‘exceptionally high level activity bordering on frantic’. If the global financial world doesn’t implode and all the new projects get underway, it might even be an ‘explosion’. Gotta love it.

      • I’m in a resource town in Queensland and there is definately a boom – it just doesn’t appear that very much of it flows on to the broader economy.

        • Agree.

          If the expansion projects were supporting local industries then things would be better. But overseas is cheaper.

          As for the workforce? Not much good if all we spend our dosh on is expensive housing, Thai hookers and penicillin.

          • Certainly agree on the supporting local industry point. Has long been my view that a reasonable percentage of all project value should be locally sourced, and I don’t just mean the labor.

            Fortunately Colin Barnett appears to have woken to the issue and is active in encouraging companies to source more product locally.

            The Thai hooker line may not be well understood to those not familiar with FIFO life – it is true that a number fly out to Thailand or the Philipines for rest and recreation…

      • Lorax – I’m in resources, I’m in Western Australia and this is a ‘boom’.

        I have no doubt.

        The vast majority of Australians aren’t in resources, aren’t in WA, and are not experiencing a boom.

        The Fairfax commenter I quoted is almost certainly in that position.

        For most of us the “Mining Boom” does border on propaganda. We are not seeing any positives from the boom apart from more buying power from our Aussie dollars. We are not seeing any mining income flow through into our lives despite Ross Gittins lecturing us that it is “delusional” to think its not happening.

        The fact is, the money is staying in WA, its staying in the mining companies and the people they employ.

        The problem that even the beneficiaries of the boom (such as yourself) cannot ignore for much longer, is there are vastly more losers than winners.

        • You’re looking at the benefits in a constrained personal way – yes, those in resources are directly benefiting (just like any sector in good times).

          Treasury estimated that there was a $100billion windfall to government coffers to 2012 and of course, more beyond. There is no other sector at present with the potential to deliver such apart from the resources. Debt saturation and end of the credit led boom has seen to that.

          • Fanboy, I agree that government is also a beneficiary of the mining boom, but most people are not benefiting directly in their day-to-day lives.

            As for your petrol price argument, please describe to me an economic scenario where the AUD falls to 50c but the price of oil does not fall by a similar amount?

            Its a complete nonsense, and you know it.

        • “The vast majority of Australians aren’t in resources, aren’t in WA, and are not experiencing a boom.”

          I think you’re right there Lorax. Mining provides jobs, minig provides royalties – these things are true. But at the end of the day, it’s also true that mining’s contibution to the overall economy……is fairly small.

          • OK Lefty – pray tell, boom over. China dead. Resources finished. And Australia …. (you (and Lorax) tell me).

            In this global world what else do our trading partners want?

          • Not sure what your point is 3d1k.

            I’m simply pointing out the very obvious – the absolutely scorching pace of resource sector growth is running hand in hand with an economy that is fairly soft overall, with weak demand. If mining really is the “golden goose”, then this situation should be logically near-impossible.

            I have passed no judgement on whether mining is good or bad or neutral – simply made the obseravtion that the real size of mining as a percentage of the economy is often overstated. A seperate observation is that this has created a broadly accepted meme in the collective mind of the electorate which makes mining companies that extract Australia’s resources almost untouchable in a political sense when policy makers have attempted to obtain a larger contribution from them.

    • > If the dollar was to fall sharply, online shopping would instantly become less attractive.

      and so would brick & mortar stores. The lower the dollar the higher the import prices. Traditional retail is screwed whichever way you look at it.

  5. lots of commentary about the high “household savings ratio” which is a fundamantally flawed but gets bandied around in the media as proof that since everyone is “saving” the economy is on a stable footing. The ABS states the household saving ratio is the difference between household income and household expenditure and the media draws the simple conclusion that since people arent spending they must be saving. this is not necesarily the case as a drop in expenditure is also explained by households that are maxed out on debt (no savings)and can no longer afford to borrow and spend like they were. down goes expenditure and up goes the “savings” ratio. If only it were that simple! The “household savings ratio” just looks at household cash flows while ignoring the household balance sheet so is only giving half the picture. analysing the cashflows and ignoring the balance sheet is a text book error, the sort of thing we have come to expect from the MM.

  6. Let’s not forget that product ranges available online are far better, and that local retailer here in Australia only stock very “basic” items.

  7. It looks like our MSM economic pundits are either suffering from “deliberately ignoring evidence in front of their eyes” disease or from Macrobation.
    It is good to see Jessica Irvine paying attention to what the loony fringe bloggers (her description, not mine) have been saying.

    • Yes! My comment was along the lines that Jessica had been macrobating – her sentiment closely (very closely) mirrors those expressed here in recent times – so closely I thought I had read them here first…

  8. Question for everyone familiar with the way retail numbers are compiled?

    When they talk about declines in retail expenditure are they only assessing listed companies, the high street, or the sector as a whole?

    I ask because through personal experience people are still shopping but not in once popular places like HN or DJs. If independent stores are doing well now, are these reflected in the numbers?

    • It seems to include all retail businesses that employ someone.

      From the ABS explanatory notes

      The scope of the Retail Business Survey is all employing retail trade businesses who predominantly sell to households. Like most Australian Bureau of Statistics (ABS) economic surveys, the frame used for the Survey is taken from the ABS Business Register which includes registrations to the Australian Taxation Office’s (ATO) pay-as-you-go withholding (PAYGW) scheme. Each statistical unit included on the ABS Business Register is classified to the ANZSIC industry in which it mainly operates.[email protected]/Lookup/8501.0Explanatory%20Notes1May%202011?OpenDocument

  9. If the AUD is historically high, isn’t that beneficial for our retailers too? Everything they sell is “made in China”, so they should benefit from the high AUD as well as any other supplier whose products are impotred. The problem is they don’t offer great quality, but they expect great margins.

  10. This site should be applauded for its use of data and analytical methods. The mainstream “economics journalists” are often lacking in these skills, and only occassionally do they use the data, and usually quite poorly. They prefer to quote their mates in big business – hardly objective journalism or economic analysis.

  11. I like Jessica Irvine’s analysis of the flattening off of retail demand but I think Alan Kohler over estimates the levels of employment in Australia.

    The current 5% unemployment rate is not comparable to the 1974 3% unemployment rate because in 1974 the unemployment rate was gained by dividing the number of people on Unemployment Benefits by the number of people in the Labour market, which didn’t count unemployed people whose partners worked. Today a survey is conducted and respondents are considered to be employed if they have an hour of paid or unpaid work in the survey period, additionally a person who is unemployed must be able to start work tomorrow and not be studying, on work for the dole, CEDP or employment program.

    The flattening of retail numbers can be accounted for by the high levels of financial insecurity in the community. 25%+ of the workforce is employed casually, lay offs are a common occurrence, Telstra is going to send 1500 IT jobs to India. Telstra demands its IT staff have university qualifications.

  12. people are sick of buying stuff – when you’ve already got stuff, why buy more …

    … or maybe those nice smart chinese people, who make everything, can make everything last only a year or even less so that we can all start over again … what’s it called? – ‘the velocity of money’ – no worries they’re running bullet trains now –

    or why don’t we ourselves start building houses that always need repair – there’d be money in that –

    … but, the head-in-the-soot conservatives (well, you know who) can’t see what oportunities to spend money a new economy in new green things would create – oh they can? – but they want to be running the show because that’s where the money is? – of course, so lets have a 2 year election campaign to stop the world until those who are born to rule fall into power – ah, so smart –

    … or maybe we should all just go get a life doing stuff …

  13. ceteris paribus

    Yes, you guys are very good. Data-based, evidence-based, pulling economics out of the anecdotal and into the scientific. A cut above.

    But go easy on the hubris.

    • moderate mouse

      Totally agree CP…this site is really lifting the game (no discredit to Jessica Irvine though…she’s MSM’s best around I would say). But the Gittins and Kohlers of the world are starting to find out, they too are moving from non-tradeable to tradeable…i know where I’m shopping from now on. And that’s what it’s all about isn’t it..this competition thing. Love it. Cheers.

  14. peg the AUD to the yuan, undercut there wages and the boom will be on. Housing will be 15k, wages at 5000 a year. Expand agriculture and piss retail off, we’ll be selling not buying on credit. Cant make money buying on credit.