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Insight

20 Feb 2013 THE AGE - CLANCY YEATES


If our economy is in pretty good nick, why are retailers always complaining about how tough things are?

Retail magnates have produced a virtual laundry list of causes for the industry's difficulties in recent years.

The high dollar, internet shopping, labour costs, the carbon tax — all have copped the blame at some point.

But there's a much more significant cause for the industry's pain that they're much less keen to single out: their customers.

Since the middle of last decade, there has been fundamental change in household spending patterns. The effects of these changes to how we spend are still rippling through the economy, and are responsible for a large chunk of the challenges facing many big employers.

The graph shows that from about 2005, consumers began spending a significantly lower share of their incomes on goods and services that are discretionary, or non-essential.

The share of spending that is discretionary (such as cultural and recreational activities, retail, alcohol, hotels and eating out) has fallen from about 32.5 per cent of budgets to 28.5 per cent.

At the same time, we've devoted a greater share to what economists regard as necessities, such as education, health, food, housing and utilities.

What brought about the shift?

A common explanation is that households have re-adjusted their budgets because they started to realise the spending sprees of early last decade were unsustainable, as much of the binge was funded by a boom in asset prices.

Since the financial crisis, the share of income we're prepared to spend on many non-essential products has tended to drop.

Total spending is still growing. But it's doing so at a moderate rate of 3 per cent to 4 per cent — roughly in line with what we're earning.

Few would dispute that this is a much more sensible approach to household budgeting than relying on rising house prices and rising share prices. But for the industries that relied on us splashing out — especially retail — it's made life much harder.

Many of these businesses are being forced to cater to a more cautious breed of consumer, who are more reluctant about living beyond their means. It's a wrenching change for firms across the economy, even if it is ultimately in the households' best interests.