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Strong resources sector employment may be offsetting subdued spending, but what’s behind the weak retail figures in the first place?
At the height of the Global Financial Crisis (GFC), Australians were reminded just how important the retail sector is to the economy.
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A government program of bonus cash handouts provided an almost immediate boost to households’ retail spending. With the retail sector then the largest employer in the country, maintaining retail spending was critical.
The cash handouts did their job. In the 12 months to October 2009, retail spending jumped by a respectable 5.8 per cent; employment within the sector was largely unchanged.
Buoyant post-GFC spending has, however, not been sustained. In the 12 months to October 2010, sales rose by just 2.2 per cent (before taking inflation and population growth into account) and Australians would appear to have reduced their retail expenditure on a real per person basis over that period.
DATA ANOMALIES
While retail sales have been weak, however, household incomes have seen reasonable growth as employment and wages have steadily increased. Households therefore appear to have consciously decided, rather than been forced, to reduce spending – which is somewhat inconsistent with current, generally high levels of consumer confidence.
Also unusual is the inconsistency in sales between different categories. Over the 12 months to October 2010, the ‘cafes, restaurants and takeaway foods’ category performed significantly better than other categories (see chart). As the most discretionary area, the restaurants category would be expected to show the most pronounced weakness.
THE ROLE OF INTERNET SHOPPING
These two inconsistencies may suggest a third variable impacting recent spending patterns. Local consumers are increasingly shopping online and purchasing from overseas retailers and the high Australian dollar may have helped accelerate the trend.
Online spending would not be picked up in the retail sales numbers reported by the Australian Bureau of Statistics. While it is not possible to verify the scale of any such movement, a shift towards online purchasing may account for some anomalies in the recent retail spending data.
A rise in unreported overseas internet purchases would help explain why official retail sales numbers have been so weak despite strong consumer confidence.
IMPLICATIONS OF WEAK RETAIL SPENDING
A weak retail sales performance has important implications for the Australian economy more generally. Just as the mid-GFC boost given to retail was important in stabilising employment, the recent weak spending could create a post-Christmas shedding of staff.
Ongoing expansion in the resouces sector could take up some of the slack created by a subdued retail sector, but prospects for ongoing employment growth appear more finely balanced.
As such, the need for additional interest rate increases in the current cycle may be becoming increasingly questionable.
