After mounting something of a recovery in early 2017, retail sales crashed in August, falling 0.6% for the month, compounded by a revision to the July number falling 0.2%. The dead cat of retail sales bounced and has since crashed back to more or less its year-on-year trend.
As the chart below shows, there are often successive months of rises in retail sales, followed equally often by large slumps. The month-by-month data is patchy, and seasonal. But the inescapable line is the year-on-year line, which shows how in early 2017, retail sales looked to be recovering after something close to 3 years of more or less continuous decline. But the bounce was short-lived, with the value of retail sales growing less than half of the long-term average.
To go straight to the dashboard and take a closer look at the data, click here.
These are worrying trends, with the data potentially becoming suspect because the influence of retail sales over the internet is not properly taken up in this data. Indeed, that could be a cause of at least some of the decline.
That is of course a concern, but it is nothing compared to the real concern – Australian households are unable to contribute more to the economy through retail expenditure, because of their indebtedness.
Australia’s household debt-to-income ratio is now at a record 194%, of which 68% is linked to mortgages. Any money the average household has is going straight into paying off debt, it would seem.
That is a concern because as the ABC’s Michael Janda called it:
“Home price growth is finally running out of steam,…” and “…Wages growth has continued to flatline — at 1.9 per cent it’s the lowest since the last recession.”
So with retail sales low, there is less incentive for businesses to put on additional employees or add to employee hours. That is suppressing incomes and the capacity in turn of those employees to play their role as consumers. In that context, add in an interest rate rise and you get even less retail spending. A vicious circle.
It does seem this has been occurring for some time already. As the chart below, prepared by Janda, shows, Australia’s retail sales growth averaged 6.1% per annum for the decade to 2010. Then, through to 2014, it slumped to an average 2.8% per annum before rising again and then gradually but more or less continually declining back to the annualized 2.8% by mid 2017.
The suspicion from the latest data is that the combined pressures of soft working hours, low wages growth, high household indebtedness and a nagging fear that interest rates are soon to rise, no matter what, are keeping consumer’s wallets in their pockets.
What that means for the Australian economy is that without the base of retail sales growing, economic growth will need to come from somewhere else. Business investment seems the logical place in a tight labour market, but that has been a long time coming and is awaited with increasingly anxious breath.
There are some bright spots in the outlooks, including the self-reporting of outfits like Infrastructure Partnerships Australia. They report, in their annual Investment Report for 2017, that 70% of surveyed investors are ‘highly likely’ to invest in Australian infrastructure.
The investors do report concerns about the sovereign risk challenges of investing in Australia – especially in energy resources. Their main interests are in roads, energy and other utilities, with the argument made constantly that less government policy intervention would be welcome (but more regulatory certainty about income yielding monopolies also being welcome).
There are challenges in getting infrastructure right for the future, but assuming it can be done at all efficiently, the chart below shows where the investors think the effort should be.
If these opportunities can be lined up with actual economy-wide needs, perhaps infrastructure investment can be the primer for business investment that is so sorely needed right now. The health of the economy may rely on it.
Full report is available at:
