There's suddenly a glimmer of hope for Australia's beleaguered retail sector, but there are still plenty of reasons for caution

Is it a sunrise or sunset for Australia’s retail sector? Photo: Adam Pretty/Getty Images

After a pretty bleak September quarter, there’s suddenly a glimmer of hope for Australia’s beleaguered retail sector.

Retail sales, after a very weak run, rose by 0.5% in October, the largest percentage increase since May.

And now consumer sentiment, as measured by the Westpac-MI survey, jumped 3.6% in December, leaving it at the highest level in four years.

After what’s been seen in prior months, this is a promising sign that the household sector may be about to join business and government in helping to prop up economic growth.

Is this the moment that the ducks finally line up with strength in the labour market translating to improved confidence and a lift in household spending?

No one knows whether this truly is a turning point. One month does not make a trend, and there’s still plenty of reasons for caution.

Take the chart below as a prime example.

Source: Commonwealth Bank

From the Commonwealth Bank, it takes the responses from the Westpac-MI survey as to where’s the wisest place to invest new savings. It’s fairly telling about the risk tolerance of households right now.

Even with confidence sitting at a four-year high, Australians still aren’t willing to take on additional risk with well over 50% nominating bank deposits or paying off debt as the wisest ways to use new savings.

In comparison, investing in housing and stocks — or taking on additional investment risk — still continues to languish around the lowest levels on record.

If households aren’t willing to take on additional risk, it does raise the question as to whether they’ll be willing to lift their spending levels, and with it economic growth.

“Household spending accounts for around 60% of the economy. So households being able to maintain a decent rate of spending growth is a key requirement for the economy to be able to meet our and the RBA’s forecasts for GDP growth of 3% over the coming years,” says Kristina Clifton, Economist at the Commonwealth Bank.

“The latest retail trade data showed a decent 0.5% lift in the month after four very weak outcomes. Combined with the lift in confidence these readings are a tentative sign that household spending growth may be stronger in Q4 after a weak Q3.”

Like Clifton, most other economists seem to share a similar view that it’s a promising sign for the household and retail sectors, and as a consequence the broader economy.

However, that’s not the only thing they agree upon.

If this is truly a turning point for household spending, all seem to suggest that the re-acceleration will likely be slow and muted at best.

“Growth in consumer spending is likely to have also bottomed out in the September quarter,” said Bill Evans, Chief Economist at Westpac.

“However, with ongoing weak income growth, a low savings rate and high debt levels we cannot be confident that consumers have the capacity to sharply lift spending despite higher confidence.”

Henry St John, Economist at JP Morgan, shares a similar view.

“While today’s details are more robust, household balance sheets are likely to remain constrained through 2018, as a combination of low wages growth, tighter mortgage rates and rising utility prices persist,” he says.

Kate Hickie, Australia and New Zealand Economist at Capital Economics, also took a keen interest in the split between where respondents said was the wisest place to invest new savings.

“It implies that households are reluctant to take on more debt to compensate for weak income growth,” she said.

More broadly, Hickie says the overall consumer confidence reading is “broadly consistent with annual consumption growth rising from 2.2% in the third quarter to closer to 3.0%”.

However, with household budgets still tight, she remains cautious as to whether that’s likely to be replicated in reality.

“We aren’t quite as optimistic given the many headwinds still facing consumers. We expect consumption growth to remain around 2.0% in 2018,” she says.

Perhaps the key takeaway from today’s report is that it’s a promising sign. However, it will remain just a sign until we see improved confidence — resuming it lasts — replicated in spending levels.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.