Another tough year ahead for retailers

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  • Real (inflation-adjusted) retail sales grew 2.6% in 2017-18, an improvement on 1.9% of the previous year.
  • This was driven by a strong 1.3% quarterly increase in June.
  • But household budgets are under pressure from tepid wage growth, falling house prices, and rising non-discretionary costs.

Overall growth in retail spending, fueled by a dip into household savings, is about moderate again but more spending is expected on food, according to forecasts by Deloitte Access Economics.

Retail spending improved in 2017-18 but consumers had to dip into their savings to support this.

According to Deloitte Access Economics’ latest quarterly Retail Forecasts report, real (inflation-adjusted) retail sales grew 2.6% in 2017-18, an improvement on the 1.9% of the year before.

Retail volumes rose 1.3% in the June quarter but growth is set to moderate.

“Department store sales were particularly strong after a disappointing start to 2018, growing 2.2% over the quarter,” says Deloitte Access Economics’ partner David Rumbens.

“But this pace of growth cannot be sustained given the pressure on household budgets.”

Deloitte says household budgets remain under pressure thanks to continuing subdued wage growth and non-discretionary price rises.

The forecasts:

Deloitte Access Economics

Real retail sales growth for the current financial year is expected to remain around the 2.6% mark, the same as last financial year.

More of the spending growth will likely go to the food sector, which could outpace non-food spending for the first time in five years.

Retail price growth, which was zero last year, is expected to pick up this financial year as retailers push through some cost increases.

Rumbens says weaker consumer confidence will dampen spending on large items, while food will benefit from small wage growth improvement.

“With the property market moderating and mortgage rates likely to rise, households may pull back on credit sensitive and more discretionary spending,” he says.

“But a small pick-up in wages will provide a broad-based boost to household incomes, and support spending on food, apparel and other staples.”

The household savings ratio fell to a decade-low 1% in June 2018, a dramatic fall from the 4.7% in March 2017.

“With income growth stagnating and some non-discretionary prices rising strongly, many households turned to their savings to support spending,” says Rumbens.

“This decline, ongoing since 2015, has actually helped retailers. Consumers opened their wallets at the end of the financial year, with June quarter sales surprising on the upside.”

However, savings-driven sales growth can’t last forever.

“The growth trend is unlikely to continue in the second half of 2018, as household budgets continue to come under pressure from tepid wage growth, falling house prices, and rising non-discretionary costs,” says Rumbens.

“Stronger income growth will be needed going forward. Unemployment dropped to a six-year low in July, but there is still a fair bit of slack in the labour market. This will continue to limit wage growth through the rest of the year, although we do expect some improvement on this front.”

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