I wish I was Paul Boxham. Orthodox macroeconomic thinking with no doubts whatsoever! Life would be so easy.
Following is his latest note on a forecast 2013 retail rebound. I’ll let you decide how credible it is. Certainly not incredible. At Macro Investor we’ve advised not fighting the RBA for the time being. Here is the potted argument:
There are a number of factors that should make retailers optimistic about the future.
First, Australian households have done a fair bit of deleveraging already, having done most of the heavy lifting of their saving rate 3-5 years ago. Most households are now well ahead on their mortgage repayments.
Second, the RBA has lowered rates by 150bp and is looking to provide support for this sector of the economy as they seek to rebalance Australian GDP growth when the mining investment contribution to growth fades in the second half of next year. The RBA still has a powerful tool for making this happen.
Third, lower rates are already driving some recovery in housing prices and the residential construction cycle. As more houses are built, more furnishing and durables are required to fill them (Chart 9).
Fourth, the depressing effect of the Australia dollar on growth in retail sales and on retail margins should start to wear off, as the currency has now been steady at above parity for over two years. There has already been a significant slowdown in growth of international travel by Australian residents (Chart 10). With lower growth in international travel there is likely to be less of a pick up in spending abroad by Australian domestic residents. There has also been strong growth in international arrivals from China over the past couple of years, with this trend set to continue (Chart 11). The depressing effect of the previous Australian dollar appreciation on imported goods prices is also starting to wear off which should see local retailers more able to maintain margins.
Hmmm, well, it’s bold to the point of foolhardy to predict the end of deleveraging, though maybe consumers might have a year off.
The RBA has cut rates but until September we’ve seen an infinitesimal response in credit and naught in credit cards.
The third point is fair enough if the RBA can generate renewed housing construction. But I remain sceptical unless house prices really get moving (which the RBA looks paranoid about) because of the valuation gap problem.
Tourism has turned around recently but sits at the bottom of a very deep trough.
Finally, the depressing effect of the Australian dollar on imported goods was surely helping sustain not compress retailer margins, unless we’re talking about import competing retail, which will still be stuffed with a high dollar so I don’t follow.
In short, backing retail is a decent sentiment play but fundamentally you gotta wonder!
121114 Downunder Digest Australian Retailers to See a Better 2013
