- Despite positive trends in retail sales, Morgan Stanley says “cross-currents” remain for Australian consumers.
- The bank’s analysts cited a recent downturn in demand for big-ticket items such as cars and furniture.
- They linked the falls to lower house prices, and said there are other headwinds to navigate before consumption returns to trend growth.
The prospect that Australian households will batten down the hatches as house prices fall remains a key risk to the domestic economy, Morgan Stanley says.
The outlook for domestic consumption remains a key talking point in Australian markets, given the ongoing combination of high household debt and low wage growth. Household consumption is around 60% of Australian GDP.
In a macro research note on the consumption outlook, the MS strategists said “cross-currents for the consumer persist”.
On the positive side, monthly retail sales data has now beaten expectations for three straight months.
In addition, consumer sentiment had a boost last month following the roll-out of the federal government’s tax cuts.
However, MS believes “there are signs the housing slowdown is starting to impact bigger ticket retail categories”.
As a case in point, vehicle sales in July fell by 7.8% in annual terms — the sharpest monthly fall since 2008.
The fall was also in excess of the RBA’s own forecasts. Previous modelling by the central bank predicted a 0.4-0.5% fall in vehicle sales for every 1% decline in gross housing wealth.
In addition, MS said sub-indexes within the headline retail print suggest some weakness in the big-ticket products.
“Furniture sales turned negative in July (-2.6% y/y), while hardware sales look to have plateaued (slowing to 0.9% y/y),” they said.
In that sense, the recent run of solid data for Australia’s retail sector has, in part, been a by-product of intense competition in the sector.
MS said the first signs of consumer weakness were evident as far back as March last year. In response, local retailers offered discounts to maintain market share:
That’s helped to sustain the volume of retail goods sold, while retail prices have steadily been in decline.
“Discretionary cash flow trends remain weak and headwinds from higher petrol prices will absorb much of the income tax relief,” Morgan Stanley added.
Australia’s household savings rate is still hovering near decade-lows, and data from Commsec today showed annual growth in credit card debt rose at its highest level in six and a half years.
“Consumption is key to getting to trend growth, but current conditions suggest there is much to negotiate before calling that trend your friend,” MS said.
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