Australian retailers received some welcome news today with the ABS reporting a healthy lift in retail sales of 0.43% in August. It was the largest percentage increase since October last year, and a welcome reprieve following paltry gains of 0.12%, 0.08% and 0.01% in the previous three months.
However, even forgiving some statistical quirks in the seasonally-adjusted figures surrounding department stores sales, the healthy headline increase did little to address the overall trend in sales.
As the chart below shows, annual growth in turnover is continuing to slow, rising just 2.84% over the past 12 months. It was as high as 6% at the start of 2014.
While disinflationary forces, weak household incomes growth, slower population growth and elevated levels of underemployment have all contributed to the deceleration, perhaps there’s an even greater overarching theme that is dissuading consumers from spending: our debt levels.
This chart from Tapas Strickland – who, incidentally, correctly predicted today’s figure – of the National Australia Bank’s economics team tracks the year-on-year percentage growth in Australian retail sales against views on where is currently the wisest place to save, a component within Westpac’s monthly consumer sentiment survey.
Strickland has inverted the latter, and there’s clearly a relationship between the two. As more people have nominated debt repayment as the wisest place to save in the Westpac survey, it’s corresponded with the deceleration in retail sales growth seen in recent years.
“Putting aside the volatility, today’s print suggests the pace of retail trade remains subdued, partly on the back of lower prices, but also because it appears consumers remain cautious with spending, evidenced by an increasing preference to pay down debt rather than invest or spend their savings,” says Strickland.
Given the current preference to save rather than spend, along with fierce price competition between retailers, declining sales in mining-orientated states, soft incomes growth and increased level of part time employment, Strickland suggests that “it’s likely headline retail sales will continue to be growing overall at moderate rates”.
While increased saving, whether through debt repayment or deposits, will be welcomed by policymakers near-term given Australia’s elevated household debt levels, the concern will be if this behaviour becomes entrenched, potentially leading to adverse economic consequences that could feed through to an even greater slowdown in consumption growth.