This economist thinks that tough times for Australian retailers are here to stay

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Australian retailers, as a whole, are doing it tough right now.

Whether measured in total sales or sales volumes, Australians aren’t spending up at the shops like they used to. And compounding the issue, competition across the sector is fierce, intensified by growth in online retailing and an influx of major foreign chains to the Australian marketplace.

Margins are declining, and that’s impacting profitability. And in turn retailers are shedding staff, letting 59,200 workers go in the 12 months to February this year, according to figures released by ABS.

Source: CBA

It paints a fairly bleak picture, and one that Gareth Aird, senior economist at the Commonwealth Bank says, is not just due to fierce competition across the sector, but also the health of household finances.

“Consumers have a fine amount of disposable income and even with the assistance of a falling savings rate, record low wages growth has weighed significantly on the discretionary parts of retail trade,” he said in a note released earlier today.

“The evidence indicates that households have devoted a greater proportion of their wallet to spending on health, utilities and education in recent years.”

And, despite booming house prices in Australia’s southeastern corner, it doesn’t appear to have had much of an impact on retail spending, seemingly unable to offset weakness in household incomes.

The wealth effect, as it is known, hasn’t really been evident to date.

Aird suspects that’s because the lift in house prices was not driven by incomes growth but by an increased debt, a factor that the Reserve Bank of Australia recently warned could detract from household spending.

With the household sector showing signs of weakness, particularly with house price growth now starting to slow, wage growth running at record-low levels, and more foreign retailers looking to enter the Australian marketplace, the question that has to be asked is can, in such an environment, conditions for retailers actually improve?

To Aird, the answer is almost certainly no.

In his opinion, conditions across the sector will remain difficult for some time yet.

“In our view, the slow rise in prominence of online retailers is structural and therefore it is here to stay. This means that the Australia retail sector will face a permanent headwind,” he says.

He says that with stimulus from lower interest rates close to being exhausted, the only way that retail spending can lift will be if wages and household income growth accelerate or if tax cuts are delivered.

And, given the current set of circumstances, he’s not holding out much hope that either will eventuate, at least in the short-to-medium term.

“With the latter already having been ruled out, only a lift in wages growth will drive an increase in retail sales growth,” he says.

“Given the significant amount of slack in the labour market we don’t see that happening in 2017 and we therefore conclude that the retail trade sector, in particular the discretionary parts of retail trade, will continue to be under pressure throughout the year.”

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