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Retailers continue to operate in a highly challenging environment, with household budgets under pressure and profit margins whittled down due to rising operating costs.
Annual sales volumes growth has been steadily decelerating since the beginning of 2018, but while sales growth has dropped off sharply in real terms, in nominal terms (money of the day) the fall is more moderate. The difference is retail inflation, which is now increasing at its fastest rate in a decade (2.3% growth over the year to June). This is largely coming through food retailing, with the drought pushing up supply prices, and these price rises transmitting through to customers. A lower Australian dollar pushing up import prices is also a culprit.
However, neither factor is expected to persist, so expect retail inflation to fall back down over the next year, leaving room for sales volumes to rise more strongly. And having fallen this far, sales volumes may be at a turning point. Retail growth in the second half of 2019 is set to lift, driven by supportive monetary and fiscal policy. Deloitte Access Economics’ latest edition of Retail Forecasts projects growth in retail turnover to strengthen to 2.0% in 2019-20, as federal government tax offsets and interest rate cuts support spending heading into 2020.
That said, retailers should be prepared for what may be only a slow improvement in the consumer environment. Wage growth remains subdued, and while the tax and rate cut stimulus will provide a boost near-term, it will likely be a one-off lift in sales growth, with stronger wages and jobs growth needed to turn any improvement into something more sustainable.
In response (and because of broader headwinds), the Reserve Bank has shifted its position on monetary policy over the past few months, recognising that to stimulate wage growth and drive inflation towards its 2-3% target range, the unemployment rate needs to fall further than previously thought. While the central bank paused its easing cycle this month and last, further rate cuts may still come. And in addition, Governor Lowe has confirmed that more unconventional monetary policy actions, such as government bond-buying, are not off the cards if circumstances require.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Todd joined Deloitte Access Economics in March 2018 after completing his Bachelor of Science and Bachelor of Economics conjoint, with first class honours in Economics from the University of Sydney. Todd’s primary interests involve financial markets and macroeconomic policy analysis using time series econometric techniques, having conducted research involving asset bubbles, industry level growth prospects and monetary stimulus in recessionary times. Prior to joining Deloitte, Todd worked with the university taking tutorial classes, while over summer working as a research economist.