Retailers should be confident about Christmas, Access Economics report suggests

Retailers should be confident about the year ahead, with strong jobs growth set to underpin a recovery in retail spending combined with a strong Australian dollar, a new survey from forecaster Access Economics reveals.

But the retail industry does face some challenges, the report claims, stating that population growth has accounted for more than 50% of all sales growth in the past five years. Debate during the election about a more “sustainable” Australia will potentially hurt more growth, Access director David Rumbens says.

The survey forecasts retail sales to grow by 3.2% in 2010-11, following a 2.5% increase in 2009-10. In 2011-12, it expects sales to grow by 3.7% on the back of a recovery in housing construction.

Rumbens says although the current retail environment is filled with discounts and frugal customers, that environment may disappear as customers spend more due to high jobs growth and low unemployment.

“Month-on-month spending is stronger, and jobs growth is good,” he says. “There is more consumer caution than there was before the financial crisis, but if you look at the RBA’s financial accounts the savings rate has gone down, and people are indeed spending the bulk of what they’re earning.”

The survey notes the creation of 350,000 jobs over the past year “provides a very solid base for a lift in retail sales”.

The fact these jobs were mostly full-time, and come alongside an increase in hours worked, should give retailers some confidence.

“The Australian economy should be supported by strong export growth, thanks to continuing strong demand from China. The pace of housing construction in Australia is set to pick-up, though not necessarily at the pace one might have hoped for given the significant demand for housing which exists,” the survey states.

“Last year was certainly a pretty flat year for Christmas,” Rumbens says. “But now you have good jobs growth, interest rates are on hold, although November seems to be the talk for a new rise. But you have stability around rates, consumer confidence is rising and the sharemarket is stable.”

Rumbens believes that stability should give retailers some confidence about the retail market coming up to Christmas. Spending in major categories including clothing, household goods and restaurants and takeaway food will remain strong, the survey says, although food retail growth still remains at a 20-year low.

However, there are still some challenges for retailers, especially with customer remaining so frugal. The survey says savings are increasing as a general trend, interest rates could move further and “potential hits to wealth” are looming.

“The next year may be a subdued one for house prices after some exuberance in late 2009 and early 2010. So far we seem to be safely transitioning from fast house price growth to modest growth.”

“The sharemarket remains fragile, and increasing concerns about the health of the economies of
Europe and the US are most likely to be initially felt here for retailers. A further sharemarket jolt could very quickly wipe away some of the consumer confidence we see at present.”

Spending in Tasmania and Queensland have been hit the hardest, with lower rates of tourism, a struggling construction sector and rising unemployment all affecting retailers.

The report also notes lower population growth as a threat, with both the Labor and Liberal parties discussing a “sustainable Australia” during the election, leading to a cut in migration. The report says half of all retail sales growth over the past five years can be traced to population growth, and this could be affected if skilled or temporary migration is cut.

“The likelihood of slower population growth going forward also means slower sales growth for retail. Slower population growth in the next decade will make it a much more challenging time for retail than the past decade was.”

The report also notes the minority government and a volatile global economy, with many European nations still suffering a recession, as threats to retail growth.

However, the domestic economy is performing well and strong jobs growth over the next year should provide hope for retailers, Rumbens says. As long as unemployment remains low, customers will continue to spend.

“The Australian economy is growing at a solid pace and the prospects looking forward are also good. The best indicator of Australia’s economic health is jobs. The creation of some 350,000 additional jobs over the past year is a tremendous springboard to produce a period of stronger retail growth. That is what we expect will occur.”

“The bottom line is jobs growth. Jobs growth will remain high, exports are doing very well, and that employment level will keep sustaining retailers.”