This chart shows why higher electricity prices present a threat to Australian retailers

Photo: Peter Terren/Getty Images

Australian electricity prices are rising sharply, and that will likely present a problem to Australia’s retail sector.

According to analysis from ANZ Bank, the average Australian household power bill will increase by around $200 in the current financial year, placing further pressure on household budgets that, in many instances, are already struggling with record-low wage growth and high levels of indebtedness.

And, as a consequence, that means that the outlook for discretionary spending, and for some retailers, is looking increasingly bleak, says Joanne Masters, senior economist at ANZ.

“Given that electricity is largely a non-discretionary expense, any rise in electricity bills is likely to be matched by a reduction in discretionary spending, adding further pressure to already-struggling retailers,” she said in a note today.

Pointing to the chart below, Masters’ says that the introduction of Australia’s carbon tax on July 1, 2012 provides an informative case study on how households may respond to a jump in electricity and gas prices.

Source: ANZ

When it comes to discretionary spending, the news was not good.

“Non-discretionary consumption in nominal terms rose by 1.3% q/q [quarter-on-quarter] and 1.5% q/q in Q3 and Q4 2012 respectively,” says Masters.

“In contrast, discretionary consumption spending rose by just 0.4% q/q in Q3 2012 and fell by a sharp 1.8% in Q4 2016, pushing annual growth in to negative territory for the first time since the Global Financial Crisis.”

So households, in response to higher energy costs, maintained spending levels on essentials but cut-back on discretionary spending.

At a time when retailers are doing it tough, this, should history repeat, could make things just that little bit tougher.

“The 2017 price hikes are expected to be somewhat lower than those seen in 2012,” Masters says. “Nonetheless, they are likely to hit discretionary spending, which presents a challenge to the already struggling retail sector.”

Masters notes that the average Australian household faces an increase of around 10% for electricity bills and around 5% for gas bills on this occasion, below the 15.3% and 14.2% levels seen when the carbon tax was introduced in 2012.

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