While today’s retail sales result disappointed analyst’s expectations, they are still likely to add to the country’s March quarter GDP.
As reported earlier, monthly sales values registered 0.1% growth in March on a seasonally-adjusted basis, which was well below analyst’s expectations of 0.4% growth. In quarterly real chain volume terms, retail sales also disappointed, registering 1.2% growth compared with analyst’s expectations of 1.6% growth. Still, the result was an improvement on December’s 1.1% growth, so will bolster GDP (albeit only marginally).
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Looking at the breakdown of the key components, you can see that volume growth was driven by household goods retailing and cafes, restaurants and fast food (see next chart).
Looking at the states and territories, retail sales volumes over the March quarter were driven by New South Wales – presumably on the back of its housing boom. By contrast, the ACT looks to be suffering a severe slowdown, with growth tanking over the quarter and also down sharply over the year as well (see next chart).
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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 as stated above the 1.2% quarterly result, up from 1.1% in the December quarter, will support March’s GDP growth.
That said, as the ABS was at pains to point out last year, 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:
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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.
It’s also worth highlighting once again that when adjusted for both inflation and population growth, retail sales have experienced barely any growth over the past six years – a big contrast to the stellar growth experienced in the previous 15-year period (see next chart).
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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 grow more or less in line with disposable incomes going forward (with obvious deviations quarter to quarter).
On this point, the next chart is instructive. Despite six years of sluggish retail growth, overall retail sales have still managed to exceed income growth since 2000 – incomes that were highly inflated by the one-off boom in commodity prices (see next chart).
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The above chart is a key reason why we continue to caution against those calling a new retail sales boom. 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 a continued period of subdued growth.
Viewed in this light, the recent pick-up in retail sales is likely merely a cyclical bounce of pent-up demand after the election within a longer-term structural downshift.
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.
