Retailers continue to operate in a highly challenging environment. Retail spending improved over the June quarter, yet annual growth and operating conditions haven’t been this weak since the early 1990’s recession. With household budgets under pressure and operating costs starting to rise, profits margins are being whittled down. On a positive note, tax cuts and rate cuts have been delivered – Sydney and Melbourne housing markets seem to have increased interest as a result, and retailers are now waiting for their share.
Retail sales improved marginally over the June quarter after a weak start to the year. Despite this improvement, the sector continues to struggle. The annual rate of sales volumes growth has been steadily decelerating since the beginning on 2018, and 2018-19 recorded the weakest result since the early-90s recession at just 1.3%. In part, sales volumes have been eroded by rising prices – the drought and the falling $A have conspired to deliver the fastest rate of retail inflation we have seen in a decade.
Having fallen this far, sales volumes may be at a turning point. Real retail growth is projected to strengthen to 2.0% in 2019-20 as tax offsets and rate cuts support spending heading into 2020, and as price growth moderates (allowing more room for volume growth). Saying that, retailers should be prepared for what may be only a slow improvement in the consumer environment. Wage growth remains subdued and while the 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 a sustainable lift for retail.
Chart 1: Nominal and real Australian retail turnover
Source: ABS Cat 8501.0, Deloitte Access Economics
The Reserve Bank of Australia has shifted its position on monetary policy over the past few months. Following a nearly three year period of holding rates steady at 1.5%, the central bank cut rates over two consecutive months to a new record low 1.0%. The RBA recognised that the unemployment rate needs to fall further (closer to 4.5%) to stimulate wage growth and drive inflation towards the 2-3% target range. In addition, cutting rates is more palatable against a backdrop of falling house prices and weaker economic growth, compared to 2017 when a surging property market and robust growth was weighed against stubbornly weak inflation pressures. While the central bank paused its easing cycle in August and September, further rate cuts may still come. In addition, the RBA Governor has confirmed that more unconventional monetary policy actions such as government bond-buying, are not off the cards if circumstances require it.