Robert Gottliebsen: clamp housing boom, hit by retail slump

ROBERT GOTTLIEBSEN
April 6, 2017
The Australian

Curbing the housing boom will bring a slump in retail sales.

In simple terms, Australian consumers have began to tighten their belt. Unfortunately few in the government and in the business community fully appreciate what is happening in significant parts of the retail sector.

I received a danger alert this week from my old friend Charlie Nelson at Foreseechange who for decades has been remarkably accurate in predicting retail changes. Indeed this week’s warning is really a confirmation of the early signs that emerged last September.

Then I received two other alerts 

ANZ-Roy Morgan Australian Consumer Confidence fell 2.4% to 111.1 in the week ended 2 April 2017, its lowest value since October 2015. The four-week average now stands at 112.5, falling below its long-term average for the first time since February 2016. The fall in confidence was broad based, with four out of the five sub-indices recording declines. Expectations for economic conditions for next year fell sharply, with the index falling by 5.4% to the lowest this year. Households’ views towards their current finances fell by 2.8%, while the future finances index was down 2.1%. 

And finally yesterday I was chatting to the local wine maker who tells me 2017 has been much tougher than usual (although the Shiraz crop is magnificent!).

So with the help of Foreseechange, let’s look closely at exactly what is happening. In the year to June 2016, total retail sales growth spending (not volume) was 3.0%, down from 5.2% in the year to June 2015. Sales growth has dropped further since: in the year to February 2017, sales growth was 2.7% and in the four months to February 2017, sales grew at an annualised rate of only 1.2% (based on seasonally adjusted data).

These are dangerous figures so let’s look at where the impact is hitting.

On the plus side, food retail sales increased by 3.7% in the year to February 2017 and growth accelerated slightly over the four months to February 2017. That rise in food sales is matched by a decline in restaurants and cafes. We are eating more at home where it’s cheaper.

Household goods growth went into recession over the past four months, clothing has been weak throughout, department stores recovered from recession to very slow growth, while growth slowed significantly in other retail (including pharmacy and newsagents) and especially in cafes, restaurants, and take away food. 

Over the past four months, total retail dollars increased by $97 million. Food added $140 million, household goods subtracted $53 million, and the combined total of the other categories added just $11 million

There are several causes of this slowdown. The most obvious is weak income growth.

Employment growth was only 0.9% in the year to February 2017, compared with 2.1% in the year to 2016. Hourly wage growth was only 1.9% in the year to December 2016 (a record low) and the rate has slowed progressively from mid-2012 when the growth rate was 3.8%.

To date the income growth slowdown has been offset by the fall in interest rates, motor fuel and a decline in the price of electricity following the repeal of the carbon tax.

That’s all changing. Electricity and gas prices have gone through the roof and are set to rise further thanks to the eastern state politicians. Interest rates are edging up as we try to curb the house price boom and petrol has been rising from the lows. 

Against that in Sydney and Melbourne the rise in house prices has created a wealth effect which has boosted sales and people’s willingness to spend. But suddenly everyone from bank regulators to the Federal Treasurer is talking about a housing bubble and the possibility of a reversal.

And that helps explain the latest drop in consumer confidence as measured by Morgan. 

Foreseechange goes one step further and estimates that a reduction of house price inflation from 5% to zero would reduce retail sales growth by 1%, all other factors being equal. A fall in house prices could send retail sales into recession.

So Scott, if you manage to clamp the boom you will be hit by a retail sales slump. 

And interest rate trends are not helping. On the one hand, home mortgage rates are rising which reduces discretionary retail expenditure but because banks want to lift their bottom-line terms depositors are not getting any offsetting relief.

And it’s these people who have the latent spending power because they have cash. 

And if by chance on top of all this we had a fall in employment growth it would be very serious.

The slowdown in consumer spending growth will be painful for consumer marketers and for the federal government struggling with a budget deficit. There seems to be little prospect of improvement and a high likelihood of growth slowing even further.

The federal government needs to find a way to convince business to invest and to employ more people in well-paid jobs — not easy when energy prices are going through the roof and blackouts are on the cards.

Consumer marketers are going to have to get better at finding those consumers who are both willing and able to spend. Foreseechange says about 20 per cent of consumers fit this bill and are increasingly to be found among the over 45s who hold most of the household wealth and are less exposed to the negative impact of rising interest rates.