It’s beginning to look a lot like a critical Christmas for the Australian economy

  • This year’s Christmas shopping period will be a critical gauge for consumer strength in Australia.
  • Morgan Stanley thinks retailers may be left disappointed, as falling house prices and political uncertainty weigh on sentiment.

With Christmas now just around the corner, the busy season is about to kick off for Australia’s retailers.

And 2018’s key trading period takes place at a time when Australia’s consumption outlook is delicately poised, as a strong labour market is offset by low wage growth, high debt and falling house prices.

The struggling retail sector will be looking for a boost, but Morgan Stanley strategists are somewhat bearish — a view they conveyed via a twist on a classic Christmas carol.

“It’s beginning to feel soft for Xmas,” they said.

The analysts noted that Australia’s listed retailers didn’t have a great reporting season, as earnings results left the market disappointed.

Falls were led by The Reject Shop and online retailer, after both companies downgraded their earnings per share (EPS) forecasts.


And looking ahead, they don’t see much upside risk for sales results over the Christmas period.

For starters, Australia’s household savings rate — which currently sits at a historically low level of 1% — “leaves little scope for a sudden spending spree”.

And with ongoing house price falls in Sydney and Melbourne now firmly entrenched at 13 months and counting, there’s a chance consumers will be more hesitant to spend this year.

Wealth effects from lower house prices have yet to register in hard data,” the analysts said.

However, they expect headwinds “will present themselves as peak trading season unfolds”.

Further complicating the picture, Victoria has a state election on November 24, then NSW will go to the polls on March 23 next year. A federal election has to be called by May 19 at the latest.

In view of the resulting political uncertainty, businesses and consumers are likely to take more of a “wait and see” approach over the Christmas trading season.

“This limits scope for a sustained rebound in activity over this period in our view,” Morgan Stanley said.

Although Christmas is still a month and a half away, Morgan Stanley argues the seasonal trading period now starts in November, given the popularity of online events such as Black Friday (November 23).

They noted that the “consumer response to discounting seems muted, given low wages and tapped out savings rates”.

And as a measure of how the cautious outlook, they highlighted that business and consumer confidence levels have both declined to their long-run average in recent months: