Here's what Amazon's arrival could mean for the Australian economy

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Amazon is open for business in Australia.

While few dispute that it will have a meaningful impact on Australian retailers, it’s still unclear as to what impact it will have on the broader Australian economy.

Will it provide an economic boon or a bust given the implications for the areas such as retail spending, business investment and employment?

Those are the questions that Matthew Hassan, senior economist at Westpac, has pondered while producing an excellent report into what Amazon’s arrival may have on Australia’s economy.

In his opinion, it’s likely to be limited.

“At an economy-wide level, many of the effects are likely to be marginal and come through gradually over several years,” he says.

And that includes the outlook for consumer spending, the largest and most important part of the Australian economy.

“Near term there may be some boost to consumer spending associated with the launch. However, the general consumer backdrop remains downbeat leading into year end. It is also unclear how much any lift will ‘cannibalise’ sales that would otherwise have gone through other channels,” he says.

However, Hassan says that there will undoubtedly be some positives, helping to improve the buying power of household incomes.

Given Amazon’s large-scale, low-margin operating model, Hassan says the most acute effects will be felt instead in the retail sector.

“As the retail impacts start to come through, margin pressures will clearly see additional downward pressure on retail prices,” he says.

“The categories likely to be most impacted initially account for 8% of total consumer spending, suggesting the wider impact on CPI inflation could be in the 0.1-0.2 percentage point range.”

Source: Westpac

So Amazon will likely place further downside on margins and probably weigh on inflationary pressures, something that may in turn lead to the Reserve Bank of Australia keeping interest rates on hold longer that what many currently expect.

On the outlook for business investment, Hassan says it’s unclear whether it will provide a positive or negative headwind for expenditure.

“Experiences abroad suggest Amazon’s entry also spurs increased investment in the retail sector, focused around enhancing online sales channels and associated changes in logistics. Some of this may be offset by reduced investment in ‘bricks and mortar’,” he says, noting it has already decelerated over the last 7 years reflecting the slower growth and earnings environment.

“If retailers do pursue an investment-led competitiveness counter-strategy that requires increased spend on equipment and software, that will clearly involve trade-offs when earnings contraints are limiting the overall capex spend.”

Source: Westpac

If you’re looking for further information on Amazon’s potential impact in other areas, this link will take you to the Westpac report.

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