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The latest issue of Deloitte Access Economics’ Retail Forecasts reports that Australia’s economic recovery has gone from strength to strength in 2021 – built largely on elevated consumer and business confidence.
Last week’s May labour force data saw strongly positive news for the labour market with employment lifting by 115,000 jobs, most of them full-time. The unemployment has dropped to just 5.1%, lower than it was prior to COVID.
The strong employment growth will help support strong consumer spending growth in 2021-22, combined with many households drawing down on their “war chest” of savings built over last year. But retailers will still have to compete for consumers’ dollars as more opportunities for spending open up.
Retailers started 2021 on a softer note after a record year in 2020. Turnover volumes fell 0.5% over the March quarter but remain 4.7% higher than the previous year. After benefiting from captured consumers who had little else to spend on, retailers are now facing a year where competition for spending dollars is starting to heat up, especially for those that profited from a restricted economy.
On the other hand, and with Victoria’s recent lockdown the most recent case in point, we are not necessarily snapping back to an open society. Retail spending has been at the mercy of lockdowns and restrictions since the pandemic began, and this was again true with Victoria’s recent fourth lockdown. Recent data from NAB highlights the sheer volatility in spending behaviour once restrictions were lifted, with spending in Melbourne doubling compared to the prior locked-down weekend.
Retail is expected to grow a hefty 5.9% over 2020-21 – the highest growth seen in a decade. But as retailers face stiff competition for consumers’ dollars in 2021-22, and after such a large surge, the forecast for 2021-22 growth is a more modest 0.9%, although overall consumer spending (including on services) will grow at a much faster rate.
Chart: Nominal and real Australian retail turnover
And the next shift in consumer spending is already underway as Australians’ need for social contact supports eating out and other activities at the expense of other retail spending. Nothing highlights this shift more than the performance of food-related retailing in early 2021. The strongest performing category over the March quarter was restaurant and café spending, as consumers revelled in the ability to eat out and socialise. At the same time, supermarket and other specialised food retailing fell back to the pack.
Despite indications spending behaviour is returning to pre-pandemic norms, the boost online sales received throughout 2020 held strong early into the year. While there may still be some time before the levels of online sales replicate those seen at the peak of the pandemic, continued strength in the proportion of online sales in April (9.4%), despite a fall in overall online nominal sales, indicates retailers can expect the trend towards higher levels of online shopping to continue.
For spending to grow at strong rates in the future, households will need to draw down on their savings. And a big part of this will be driven by how confident consumers remain. To date, consumer confidence has rallied strongly since collapsing in mid-2020. But as recent events have shown, future lockdowns are still a possibility. And while restrictions don’t always hurt the retail sector as a whole given the essential nature of some spending activity, the impact on confidence is a bigger risk, and one that could still have a significant impact on the consumer spending outlook.
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.