Macro Roundup: Aussie Consumers Back in Gear
Australian retail spending grew at its fastest rate in 18 months in November.
Households were slow to respond to monetary stimulus but have lately lifted demand.
Services have become a more important component of household consumption.
The lower exchange rate is a mixed blessing for Australian retailers.
Australian households are getting their groove back. After a shaky first half in 2013, looser monetary policy has lifted confidence and encouraged discretionary spending. Data released this week showed growth in retail trade at an 18-month high of 4.6% y/y in November, in line with its 10-year average and stronger than 2013’s average monthly 2.9% gain. Household consumption's earlier underperformance helped keep GDP growth below trend in 2013.
The Reserve Bank of Australia cut the cash rate by 225 basis points from November 2011, but weak confidence and rising unemployment held back household borrowing. Credit growth has only recently started to rise in line with the warming property market.
Households are more optimistic about future economic conditions and personal finances than they were a year earlier thanks to rate cuts and rising property prices, although expectations have softened recently. This is slightly worrying for the consumer outlook. Looser monetary policy combined with rising confidence is most effective in boosting demand.
That said, the link between retail trade and confidence has weakened in the past two years, probably because retail trade captures a shrinking proportion of household consumption. According to the Australian Bureau of Statistics, retail trade historically represented 55% to 60% of household consumption, but this fell to 30% in 2012 because of greater services spending, most of which is not captured in the retail data. Services including rent, education, recreation and communication comprised 10% of household consumption in 1960 but now represent almost 30%.
In the past year, expenditure on services including cafes and restaurants has outpaced retail spending on goods. From Boxing Day to mid-January, the Australian Retailers Association expects cafe and restaurant spending to rise 6% y/y, continuing to outperform.
Department store spending has been weak for several years and fell 2% in November. Department stores have not kept pace with changes in consumer spending patterns, especially the rise of online sales. According to the annual World Internet Project, online purchases by Australian consumers grew 46% from 2011 to 2013 and now represent 6.4% of total retail spending. Yet the Deloitte Christmas Retailers’ Survey from October found that more than half of respondents were expecting less than 2% of their sales from online, even though they estimate that 80% of sales are influenced by digital media. Department stores generate only 1% of their sales online. If department stores improved their digital platforms to capture tech-savvy consumers, the gap with total retail spending would likely narrow.
Stocks and sentiment closely linked
While the link between retail trade and confidence has faded in the past two years, equities and confidence have moved more in step.
A high proportion of Australians own shares so better-performing equities lift sentiment. Around 34% of Australians directly own shares, not including those who hold equities via managed funds or superannuation. The link also relates to the stock market being a reasonable gauge of the global and local economy; when economic conditions are improving, consumers are more upbeat.
Little impact from the lower currency
The Australian dollar was amongst Asia’s weakest currencies in 2013, falling 15% against the U.S. dollar. We expect the aussie to fall further in 2014 as the U.S. Federal Reserve’s tapering of asset purchases puts upward pressure on the greenback and Treasury yields, and by extension downward pressure on other currencies.
A cheaper currency tends to lower consumer spending as it makes imported goods more expensive, reducing real incomes. But for Australia's retail sector, the depreciating currency may not be a bad thing. The lower currency raises prices at online retailers, many of which are offshore, relative to local merchants, especially for goods produced in Australia. We also expect local retailers may choose to absorb higher import costs rather than passing them on to consumers. The market share of Australian retailers may stabilise, but profit margins are likely to remain under pressure.
Katrina Ell is an Associate Economist at Moody's Analytics.
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