Deloitte: Stimulus to rescue retail

By Leith van Onselen

Deloitte believes that post-election stimulus will help the retail sector rebound in 2020:

After a tough end to 2018, retailers faced yet another period of weak demand and declining retail spending over the March quarter of 2019. However, it may not be all doom and gloom for the sector, with some very much needed relief expected in the second half of the year in the form of increased tax offsets.

According to Deloitte Access Economics’ latest quarterly Retail Forecasts subscriber report (Q2 2019):

  • Real retail turnover growth is expected to slow from 2.2% in 2018 to just 1.5% in 2019, before strengthening again in 2020 to 2.9%
  • Despite steady employment growth, household finances have come under pressure from stagnant wage growth and declining wealth, and this has hurt consumer sentiment and weighed on willingness to spend.

Deloitte Access Economics partner and Retail Forecasts principal author, David Rumbens, said: “March quarter retail data confirmed our view that consumers are just not willing to spend as they once were. People are pulling back on spending as household finances remain under pressure from stagnant wage growth and declining wealth.

“But our outlook for 2019 is a tale of two halves, and there is some good news ahead. While the first half of the year is constrained by weak income growth, the latter half will likely receive a boost as monetary and fiscal stimulus work together for the first time in over a decade.

“A deteriorating labour market, inflation below the target range, weak consumption, and falling house prices were enough to prompt monetary easing by the Reserve Bank of Australia for the first time in nearly three years, and lower rates will leave some much needed cash in the pockets of Australia’s highly indebted households.

“In addition, the post-election sugar hit of tax offsets for low and middle earners are likely to boost household incomes in the second half of 2019. Usually tax cuts result in a marginally higher take home pay packet, supporting a gradual and ongoing increase in consumption. The difference this time around is that the tax policy changes will be putting cold hard cash in the hands of consumers once they have lodged their returns.”

Rumbens said that over half of all tax refunds are completed in the September quarter, and just under another 25% in December.

“This bodes well for a surge in spending in the September quarter, rising around 1.3% over the quarter, and provide the boost retailers have been craving.”

The struggling household goods sector, that has been taking a double hit from tepid wage growth and declining house prices, as well as increased competition from the rise of online spending, is expected to receive an immediate boost, as households spend the extra cash on big ticket items.

As we noted yesterday, the retail slowdown is illustrated in the next chart showing that real annual growth in retail sales fell to just 1.1% in the March quarter – the lowest level since September 2011:

Some of this decline can be explained by the collapse in real household disposable income:

Partly offset by households reducing their savings:

However, the household savings rate appears to have bottomed, which means that consumption will be restrained going forward (other things equal).

The biggest swing factor for retail will be what happens to house prices, which are the primary driver of household wealth (and the ‘wealth effect’).

There has historically been a reasonably strong correlation between dwelling price growth and retail sales:

Therefore, until dwelling values rebound, then retail sales will likely continue to struggle.

Hence, there is a lot riding on RBA rate cuts and further fiscal and macro-prudential stimulus.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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