Back in July, I argued that Australia’s retailers needed to become accustomed to a low growth future as the twin credit and mining booms unwind:
…real retail sales growth per capita has essentially flat-lined since December 2007, following two decades of strong growth (see next chart).
There are strong reasons to believe that retail sales growth will remain soft going forward, irrespective of whether the Reserve Bank cuts interest rates further.
First, one of the key drivers of the strong growth in retail sales over the 1990s and 2000s was the inexorable rise in household debt and the run-down of household savings (see below charts).
Household debt levels stabilised from 2006, whereas household savings rates have returned to long-run historical norms, suggesting that sales growth can only grow in line with disposable incomes going forward.
On this front, the news is also bad for the retail industry. As explained in detail earlier today, the growth in household disposable incomes over the 2000s was extraordinary, driven by the once-in-a-century surge in commodity prices and the terms-of-trade. As the terms-of-trade retraces back towards its longer-run average, it will detract from income growth, pulling down consumption and retail sales in the process.
The next chart is instructive. Despite five years of sluggish retail growth, overall retail sales have still managed to grow at a faster rate than incomes since 2000 – incomes that were highly inflated by the one-off boom in commodity prices (see next chart).
The slowed retail conditions appears to be biting hard, with retail vacancy rates hitting decade highs across Melbourne’s specialty retail strips. From the Age:
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Vacancy rates across 11 prime suburban streets reached an all-time high in August, up to 7 per cent, according to Knight Frank research.
”It has reached the highest level in 10 years since we began recording data,” research director Richard Jenkins said…
And there may not be much relief ahead for battered traders.
The trends facing Australian retailers is made all the worse by the fact that the lion’s share of growth in sales has been in non-discretionary items (i.e. food retailing), whereas discretionary retail spending has experienced virtually no growth over the past year (see next chart).
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Normally when interest rates are cut, its stimulates retail sales and consumer spending. This isn’t happening this time around, suggesting Australia’s retailers are facing a tough future.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
