Retail Forecasts - August 2018
Consumers raid their piggy banks
12 September 2018: Household budgets remain under pressure thanks to continuing subdued wage growth and non-discretionary price rises. Despite this, retail spending improved in 2017-18 as consumers dipped into their savings to support spending activity.
According to Deloitte Access Economics’ latest quarterly Retail Forecasts subscriber report (Q3 2018):
- Overall, real (inflation-adjusted) retail sales grew 2.6% in 2017-18, an improvement on the 1.9% gain in 2016-17, driven by a strong 1.3% quarterly increase in June
- Real retail sales growth for the current financial year is expected to remain around the 2.6% mark
- More of the spending growth will likely go to the food sector, which could outpace non-food spending for the first time since 2012-13
- Retail price growth (which was zero in 2017-18) is expected to pick up in 2018-19 as retailers push through some upstream cost increases.
Retail Forecasts August 2018
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Deloitte Access Economics partner and Retail Forecasts' principal author, David Rumbens said: “The household savings ratio fell to a decade-low 1.0% in June 2018, a dramatic fall from the 4.7% savings ratio in March 2017. With income growth stagnating and some non-discretionary prices rising strongly, many households turned to their savings to support spending.
“This decline, ongoing since 2015, has actually helped retailers. Consumers opened their wallets at the end of the financial year, with June quarter sales surprising on the upside.
“Nominal retail turnover increased 1.2% over the quarter, the strongest rise during the financial year. However, this is not sustainable support and savings-driven sales growth can’t last forever.
“The growth trend is unlikely to continue in the second half of 2018, as household budgets continue to come under pressure from tepid wage growth, falling house prices, and rising non-discretionary costs.
“Stronger income growth will be needed going forward. Unemployment dropped to a six-year low in July, but there is still a fair bit of slack in the labour market. This will continue to limit wage growth through the rest of the year, although we do expect some improvement on this front.”
Discretionary vs staples retail spending
Rumbens said weaker consumer confidence will dampen spending on large items, while food will benefit from, albeit small, wage growth improvement.
“With the property market moderating and mortgage rates likely to rise, households may pull back on credit sensitive and more discretionary spending,” he said.
“But a small pick-up in wages will provide a broad-based boost to household incomes, and support spending on food, apparel and other staples.”
Spending up, but forecast subdued
After a strong end to 2017-18, retail volumes rose 1.3% over the June quarter, but growth is set to moderate.
“Department store sales were particularly strong after a disappointing start to 2018, growing 2.2% over the quarter. But this pace of growth cannot be sustained given the pressure on household budgets,” Rumbens said.
Profits holding up for those in the right place
Retailer profits continue to hold up well despite the difficult operating environment.
“Intense competition and rising operating costs will weigh on many retailers, but those focused on the value they offer to the consumer are likely to do well in terms of both sales and profitability,” Rumbens said.
“Price conscious retailers are supporting discount department stores, but store closures across apparel operators suggest many continue to struggle.”