Retail Spending Prospects
Next Thursday we will get full retail data for the December quarter, but what we have so far reveals that retailers had a fairly good time during 2002. In the September quarter the volume of retail sales excluding the usually volatile automotives sector was up 5.7% from a year earlier with year to September volumes up 4.6%, some 1% above the average growth rate. In the month of November nominal sales were 6.5% up from a year earlier after being 9.4% higher in October and 7.4% higher in September. The anecdotal evidence we have come across suggests sales in December were quite good – though not spectacular.
For the record, using the September year data we see that the big winners were the following storetypes.
Furniture & floor coverings +12%
Clothing & softgoods +7.7%
Recreation goods +7.2%
The weak areas were
Department stores +2.6%
Food retailers +3.0%
Cafes, restaurants & takeaways +3.0%
Why the strength in retail spending last year?
Below average interest rates from mid-2001.
Accelerated jobs growth of 2.7% in the September quarter on a year ago from 2.2% the previous year.
Catch-up spending by farmers in response to record incomes.
A surge in dwelling construction.
Strong population growth courtesy of net migration flows.
Strong growth in foreign student numbers.
Above average consumer confidence.
Rising wealth from house prices on average 8.5% higher in the September quarter than a year earlier.
Will 2003 be as strong as 2002? We don’t think so.
Farm incomes are falling and farmer pessimism is high, so we expect to see reduced farmer retail spending – but more of the absence of the catch-up period of spending than an actual fall in spending to way below average levels.
It looks like there will be a Middle East war this year. The uncertainty generated is likely to dent consumer confidence.
Jobs growth is likely to be less than in 2003 due to reduced business confidence and the effect on export revenue of the higher exchange rate.
On the other hand…
We expect continued rises in house prices this year which will underpin willingness to spend and the ability to borrow more to spend as well.
We expect the tight labour market to continue, giving people a strong feeling of high job security, again underpinning willingness to spend.
Dwelling consents data suggest there will be many new houses and apartments which will need furnishings.
Migration data suggest another period of strong population growth this year.
Newspaper reports suggest another firm rise in foreign student numbers this year.
There is a chance the Reserve Bank will cut interest rates this year, and if they increase them it may not be until very late in the year.
The rising exchange rate will tend to underpin consumer confidence and while consumers might normally take advantage of this by travelling overseas, geopolitical uncertainties suggest this might not happen in the near future.
Balancing these factors we do not get a bad picture
regarding the extent of the pullback in retail spending
growth this year. On average over the past decade ex-auto
retail spending volumes have risen 3.6% per annum. For
calendar 2003 we are picking an average to slightly below
average year with the risk being that as long as the coming
war does not go completely pear-shaped sales could be
slightly stronger than we think. And that is undoubtedly one
reason why the Reserve Bank is not rushing to cut the
official cash rate yet in spite of the stronger currency.