Australia just received another worrying signal on the health of the retail sector

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Australian business conditions remain near the best levels since before the global financial crisis, and confidence is also above it’s long-term average, according to the latest National Australia Bank (NAB) Business Survey.

Things, from a broad perspective at least, are looking good for the business sector.

As Alan Oster, chief economist at the NAB said following the release of the September report, conditions remain “rock solid”.

However, while from a broad perspective he’s right, one area remains a major concern, and it just happens to be one the most important industries in the Australian economy.

Retail.

Following incredibly weak retail sales figures in July and August, and a dire reading on activity levels in Australia’s hospitality sector in the latest Performance of Services Indicator (PSI) released by the Ai Group, the news from the NAB survey was equally unnerving.

It found that business conditions for retailers fell to -5 in trend terms during September, meaning that a majority of respondents indicated pessimistic views on current levels of employment, trading and profitability.

As seen in the chart below from the NAB, conditions for retailers are perceived to be far worse than in any other sector, approaching levels not seen in several years.

Source: NAB

“Most industries are continuing to enjoy above average levels of business conditions,” said Oster. “Retail is still the main exception, with conditions re-establishing a clear downward trend that has taken the index back into negative territory.”

It’s little wonder respondents are feeling glum following back-to-back falls in retail sales over the past two months, continuing the steep deceleration, and now contraction in sales, following a strong bounce during the June quarter.

However, despite weak operating conditions, retailers remain surprisingly upbeat as to what the future holds with confidence across the sector still sitting in positive territory.

“Despite the deterioration in retail conditions, confidence levels in the industry remain surprisingly upbeat,” says Oster.

“That could suggest an anticipated turn-around by firms, although weak retail forward orders suggest not.”

Forward orders are often seen as a lead indicator on future demand.

Oster suggests that despite most retailers remaining confident, the outlook for the sector — the second-largest employer in Australia behind health care — is anything but certain.

“The sustained weakness in retail conditions should justifiably be raising doubts around expectations for any imminent and sustained rebound in consumer spending, although tough competition and other margin pressures are likely behind the result as well,” he says.

“Our previous concerns around the consumption outlook remain well entrenched.”

And Oster is not alone in expressing concern about the outlook for household spending.

To many, the combination of high levels of household indebtedness, weak wage growth, falling savings rates, out-of-cycle mortgage rate increases and surging energy costs have only amplified concern about the state of household finances, casting doubt about the ability of households to sustain their spending levels, let alone increase them, despite robust employment growth.

The outlook for discretionary spending, and the thousands of Australians who are employed in the retail sector, is anything but certain given the weakness seen in recent indicators.

And with many households now receiving energy bills for the September quarter, and the substantial increases many will experience, it’s little wonder why many believe the household sector remains the greatest concern in terms of Australia’s broader economic outlook.

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