Retail Forecasts - December 2018
Running on empty
12 December 2018: Retailers are still upbeat heading into the Christmas period after a relatively good year so far, both in terms of sales and profits. But it’s also been another year where the household savings rate has tumbled as income growth fails to keep up with spending growth. That has been fine while property prices boomed, but with prices now falling, consumers will be more constrained when it comes to spending on retail goods.
According to Deloitte Access Economics’ latest quarterly Retail Forecasts subscriber report (Q4 2018):
- Retail spending moderated in the September quarter as the combination of weak wage growth and falling house prices weighed on consumer sentiment.
- House price weakness is more significant than had previously expected in 2018.
- Employment growth is exceeding expectations, offsetting some of this weakness.
- This will likely support another year of solid retail growth, with retail volumes expanding 2.6% in 2018-19 before accelerating to 2.9% in 2019-20.
Deloitte Access Economics partner and Retail Forecasts principal author, David Rumbens, said: “Retailers are optimistic leading into the Christmas trading period despite difficult operating conditions - but is this confidence misplaced?
“While 2018 has been pretty good for retailers, both in terms of sales and profits, it’s also been yet another year where spending growth has exceeded income growth.
“This is evidenced by the household savings rate falling sharply. For some consumers, it’s meant more spending on the credit card, for some it’s redrawing equity, and for others it’s putting less away for a rainy day. That’s been fine while wealth has been increasing. But with Sydney and Melbourne house prices now falling, consumers are running on empty and there will be some tricky transitions for next year.”
Wage growth is needed as the housing market deflates
Australian households face a potentially sizeable reduction in wealth as the property market falls. As Rumbens points out, property prices have now fallen for 13 consecutive months, with falls in Sydney and Melbourne driving national losses. Tighter credit availability has reduced demand, especially amongst investors; this, combined with a continued increase in housing supply, is exposing what was significant over-valuation.
“The good news though is labour income growth is rising. Australia’s labour market added 216,100 additional jobs in the year to October 2018, helping drive the unemployment rate lower,” he said
“The tighter labour market conditions have helped wages edge higher, but this is a slow process. Labour income will need to keep rising to offset the drag to consumer spending from lower Sydney and Melbourne property prices.”
Spending shift from consumer durables to necessities
With the housing market in a downswing, we are moving home less often, and soon there will be fewer new homes built. So there is less excuse to upgrade consumer durables.
“We expect consumer spending to swing towards food, clothing, smaller items and services and away from big ticket spending. That might even out across the retail sector but there will be individual winners and losers,” Rumbens said.
Online is hurting retail property markets
New buildings in retail have dropped sharply; instead, the investment dollars are going towards digital.
“Vacancy rates are also starting to rise more broadly, with a number of high profile retailers reducing their store footprint,” said Rumbens.
“There is plenty more growth in digital channels, which has been a focus of retailers heading into Christmas. And online sales aren’t just focused on pure-play operators such as Amazon, with majority of sales through omni-channel retailers.”