Recovery in retail sales likely to boost GDP

By Leith van Onselen

Yesterday’s better than expected retail sales are set to boost Australia’s September quarter GDP after recording 0.7% growth in real chain volume terms. The overall result contrasted strongly with the June quarter, where sales volumes fell by 0.1% and detracted from GDP (see next chart).

Looking at the breakdown of the key components, you can see that volume rises in food retailing, household goods retailing, clothing, footwear & personal accessories retailing, and cafes, restaurants and takeaway food services were partly offset by big falls in department store retailing and other retailing (see next chart).

Looking at the states and territories, you can see that retail sales volumes over the September quarter rose in all jurisdictions, except Western Australia, with the southern states and the Northern Territory experiencing the fastest growth:

Retail sales are a sub-component of household consumption, which is itself the largest component in GDP. It is volumes that matter for GDP, so the 0.7% quarterly result, up from -0.1% in the June quarter, bodes well for September quarter GDP growth.

That said, as the ABS was at pains to point at in yesterday’s release, retail’s share of Household Final Consumption Expenditure (HFCE) has fallen significantly over the past 50 years as Australians spend a greater share of their incomes on services:

Historically, Retail Trade estimates contributed 55-60% of HFCE in the expenditure side of Gross Domestic Product (GDP). However, this coverage of HFCE has fallen over time as household expenditure patterns have gradually shifted from goods to services. As a result, Retail Trade now contributes approximately 30% of quarterly estimates of HFCE.

Moreover, while retail sales growth has clearly picked-up, It would be an understatement to say that the response to interest rate cuts has been underwhelming. As shown below, retail sales in value terms have risen by just 6.1% since the Reserve Bank first began cutting interest rates in November 2011, roughly 40% below the average rate of increase experienced in the past four rate-cutting cycles (see below chart).

Moreover, when adjusted for both inflation and population growth, retail sales have experienced virtually no growth over the past six years – a big contrast to the stellar growth experienced in the previous 15-year period (see next chart).

As explained previously, with household savings rates having returned to long-run historical norms and likely to remain there, retail sales growth is likely to only grow in line with disposable incomes going forward.

On this point, the next chart is instructive. Despite six years of sluggish retail growth, overall retail sales have still managed to track income growth since 2000 – incomes that were highly inflated by the one-off boom in commodity prices (see next chart).

Given that household income growth over the next 10 years is unlikely to grow at anywhere near the pace of the last decade as the joint commodity price and mining investment booms unwind and the population ages (reducing the employment-to-population ratio), the retail sector is likely to experience an extended period of subdued growth.

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