The retail and construction sectors are some of the largest employers in Australia.
Combined, they employ 21% of all Australian workers, a percentage that easily surpasses healthcare, which is the largest individual employing sector.
As the chart below from JP Morgan reveals, they’re massive employers.
Given their sheer size, what happens in the retail and construction sectors will naturally play a significant role in determining what happens to the broader Australian economy.
They employee over a fifth of all workers, after all, and as such they provide a lot of income to Australian households. And that income is then used to spend, helping to power consumption, the largest component within the economy.
The linkages are clear, and crucial. What happens in retail and construction will be felt in other parts of the economy.
The retail sector is already struggling, perhaps partially explaining why the broader economy is now growing at the slowest annual pace since the global financial crisis. Competition is fierce, spending is soft and margins have been compressed, leading retailers to shed close to 60,000 jobs over the past 12 months.
And residential construction, after an unprecedented building boom over recent years, now looks like it’s also past its cyclical peak.
It’s not an ideal scenario for employment and consumption growth, particularly with the government and Reserve Bank of Australia expecting economic growth to accelerate in the years ahead, helping to boost taxation revenue, employment, wages and inflation.
Retail is already weak and construction looks set to weaken, that we know. What we don’t know is just how things will play out.
To JP Morgan’s Australian economics team, it could well be worse than what many people currently believe, noting that both these sectors are about to face additional headwinds that further pressure these sectors, helping to cloud the outlook for employment growth and consumption growth.
“Both these sectors will face meaningful headwinds in the next 1-2 years,” the bank wrote in a research note released earlier this week.
“For retail, the culprit is likely to be the potentially disruptive presence of Amazon. And for construction, the peak in the residential dwelling investment will loom as a material headwind.”
The bank details its concerns on both fronts below.
Here’s it’s view on the arrival of Amazon, and the impact it could have on not only the retail sector.
Retail employment accounts for 11% of total employment, and is the second largest employer by industry. There has already been considerable disruption in clothing and footwear retail given the physical entrance of large international retailers into the Australian market. It is feasible that Amazon delivers similar disruption but across a broader range of industries (electonics, hardware etc). So while the near term impact might be most evident in inflation metrics, there is a non-trivial chance that the longer term impact of Amazon is felt more keenly across the real economy as retail adjusts to an aggressive online competitor.
And its assessment on potential pressures facing the construction sector, coming at a time when activity levels look set to slow following a noticeable drop in building approvals from the levels seen a year ago.
A slowdown in lending and housing turnover from higher mortgage rates and macro-prudential tightening will drag on the consumer, by limiting wealth effects, slowing credit growth and confiscating disposable income for consumption. Rental inflation is also likely to weaken further. Whether there is more damage through real/financial channels remains to be seen, though spillovers from falling building approvals to home construction and employment could take some time to play out.
They’re clearly big risks facing two very big sectors. And if they were to weaken substantially in the period ahead, it would undoubtedly impact employment growth and household spending as a consequence.
“It is not hard to see a circumstance in which the Australian consumer comes under more pressure”, says JP Morgan. “If the labour market eventually buckles under these twin pressures, then the RBA may be facing a more acute collapse in employment growth and consumption.”
While it remains unclear as to whether that will eventuate, JP Morgan thinks that household consumption — already decelerating — will likely slow further over the next couple of years, with risks to that view slanted to the downside.
“(Our) central forecast is for real consumption growth of 2.1% over the remainder of 2017/18, the weakest outside recessions for the last 30 years,” it says.
“Further, the distribution of risks to this forecast is asymmetric — upside risks are minimal, while there are plenty of downside risks to the consumer given rising energy costs and a forthcoming housing correction.”
Given those risks, the bank says that the “Australian consumer offers little cushion for a central bank that requires trend or better growth in order to facilitate target consistent inflation outcomes”.
And with the household sector weak, that will place additional pressure on other parts of the economy to drive GDP growth, it says.
“This places greater pressure on other components of domestic demand, such as government infrastructure and private capex, to deliver robust outcomes. Details of this week’s GDP outcomes underscore that such outcomes cannot be taken for granted.”
Given household consumption is the largest part of the economy, it’s doubtful that other areas of the economy will be in a position to drive growth should JP Morgan’s forecasts be on the money.