According to ARA Executive Director Richard Evans, a two percent increase on the bumper 2007 Christmas period ($36.5 billion) was a great outcome.
“Considering all the negativity about the economy in the market in October and November, by the last two weeks of December, Australians were more confident about gift giving with reduced petrol prices, lowering interest rates and the Rudd Government’s cash bonus,” he said.
The retail cycle peaked in December 2007 at eight percent growth year on year. 2008 saw the cycle commence its decline and for the first six months the decline was in line with expectations. The ARA’s advice to the Reserve Bank of Australia reflected what it saw in the cycle and the resulting ease in consumer demand.
In the second six months of 2008 the decline accelerated and this was compounded by world events especially in the last two months. The global financial crisis saw asset values decline significantly and the Reserve Bank reacted to the slow down with cuts in the cash rate between September and December amounting to three percent.
The industry also saw the return of lay-by and less use of credit cards.
ARA Executive Director Richard Evans said retailers had also worked hard to stimulate consumer spend with heavy discounts during post-Christmas sales through to late January.
“Retailers offered generous sales of up to 70 percent off or more for consumers who were struggling with limited discretionary spend earlier in the year but had cash to responsibly enjoy some discounted retail therapy during post-Christmas sales,” Evans said.
Department stores benefited from the heavy discounting and the apparel and household categories reported better than expected sales.
“Many shoppers held out for substantial savings on domestic appliances, furniture and other big ticket items giving a $2.3 billion boost (as expected) to the household goods and entertainment sector which has been struggling with low trade for months,” Evans said.
The table below shows the state expenditure in the Christmas period and the post-Christmas sales.
Retail projections for 2009
Although December sales were given a much-needed shot in the arm, a number of sources predict the year ahead will present the retail sector with a number of challenges.
There has been a marked deterioration in the world economic conditions in the last quarter of 2008. Unlike previous downturns the deterioration is synchronised across all economies on a global scale. Declining equities and commodity prices, reduced asset values, business failures and reduced sentiment in both consumer and business confidence has resulted in a downturn in private spending. Current reports indicate there is not one economy in the world likely to grow in 2009.
The weak spending has been accompanied by an easing in inflation with a wide range of commodities falling in the later part of 2008 and stabilising in 2009. This has been assisted by the fall in oil prices and the prices of international goods softening as a result of weaker demand. The global credit market has tightened significantly. Some are expecting recovery to be slower than in previous downturns.
The ANZ bank in their Industry Outlook 2009 indicated that “household consumption will be flat (in real spending terms) with growth only picking up slowly in 2010”. This outlook is predicting rising unemployment and the sharp increase in the national savings ratio as households become more cautious in their spending and finances.
Recent surveys indicate Australian business reported a sharp downturn in confidence in the October and November period.
This was partially turned around in December following the Government’s fiscal package. In overall terms consumer confidence is still low, business is still reporting difficulty in obtaining credit and there has been a cut back in production due to weaker external demand.
However petrol prices are lower, interest rates are at the lowest level since the 1960s and the recent fiscal measures will flow through into the economy in the March and June quarters. Inflation has declined significantly and is predicted to fall to 1.75 percent for the year ending June 2009. However GDP is predicted to fall to 0.25 percent for the same period. With such a fall household consumption will also be weak. Any recovery is likely to be late in 2009 and it will be 2010 before any recovery will gain some momentum.
Consumer Price Index
The Consumer Price Index after climbing to over five percent in 2008 has fallen to 3.7 percent in the December quarter year on year and is heading back to under the three percent range that is the RBA benchmark figure. It is worthwhile noting that outside of food which is still at 5.8 percent the other retail categories were below the three percent mark. Non retail factors such as utilities at 10.8 percent, financial services at seven percent, property rate at 6.1 percent were the main contributors to keeping the CPI above the three percent mark.
The Reserve Bank is now predicting the CPI will continue to fall. The Bank’s latest Output and Inflation Forecasts are shown in the table below. They reflect the percentage change over the year to the quarter shown.
Actual GDP data to September 2008 and actual data to December 2008. Underlying inflation refers to the average of trimmed and mean weighted inflation. For the forecast period, technical assumptions include A$ at US$0,65, TWI at 54, cash rate at 3.25 percent, and WTI crude oil price at US$55 per barrel and Tapis crude oil price at US$57 per barrel Sources: ABS; RBA
On a positive note while the retail sector is one of the first to hit by any economic downturn, it is also one of the first to recover.
Consumer spending responds very quickly to changing moods and circumstances. Food will continue to report better figures than other sectors as will some small luxuries such as cosmetics, accessories and coffee. Consumers view these items as a treat.
Retail Sales Projection 2009 Given the current volatility in the global financial markets two estimates are provided. The first is on the basis that nothing else un-towards emerges during the year and we can look forward to a slow recovery. The package just announced by the Government will reinforce these figures and may even provide the stimulus to see them go positive
The second is that the current position slips even further and recovery even with the fiscal stimulus does not start until 2010.
In both cases the retail spend will down on that for the calendaryear 2008.
The ARA perspective
Based on this report, 2009 will be challenging for the Australian retail sector. However, the fundamentals of the economy are still strong with low interest rates, low petrol prices, low unemployment and a Federal Government not overburdened with debt to date. The ARA can foresee some recovery in the retail sector in late 2009 if:
- Current levels of unemployment do not rise over six percent
- Media commentary starts highlighting the positives of the economy and encourages Australians to continue spending to ensure economic stimulation; and
- The negative rhetoric from other retail associations and economic commentators stops.
This will help consumers gain confidence in their economic outlook and create a sense of job security. With more cash flowing through the economy again, this will ensure job security will remain through – not just retail – but the entire supply chain. This is the only way the ARA can see recovery of some description in 2009 and meet earlier predictions of growth.
