Don't count on a lasting retail recovery

September's retail sales figures beat market expectations, but there are signs household spending will remain subdued for the foreseeable future.

Household spending rebounded in the September quarter and is set to contribute solidly to consumption growth in the national accounts. But will the recovery last, particularly as real wages decline and the terms of trade deteriorates?

The value of retail sales rose by 1.2 per cent in September, beating market expectations, to be 5.7 per cent higher over the year. Sales have recovered somewhat over the past three months after a particularly weak June quarter.

The Australian Bureau of Statistics attributed the strong result, in part, to the release of the iPhone 6. Few consumer products can move the headline retail figure -- a new Harry Potter book being one and videogames such as Grand Theft Auto being another -- which indicates the esteem with which Apple is held by Australian consumers.

As a result, household goods retailing rose by 4.1 per cent in September, with electrical and electronic goods rising by 9.2 per cent. Expect a bit of a snap-back in October, which is typically the case following a one-off consumer event.

On a quarterly basis, retail volumes -- which is retail sales adjusted for changes in consumer prices -- rose by 1 per cent in the September quarter, to be 3.4 per cent higher over the year. This is a fairly strong result, particularly following a modest decline during the June quarter, and points to a solid contribution from the household sector when the national accounts are released.

But it’s also important to note that retail trade is merely a fraction of total consumption, with spending on services now accounting for almost two-thirds of total spending. Increasingly the retail trade survey is a poor measure of household activity but unfortunately there are few timely nor comprehensive measures of expenditure on services.

Beyond the iPhone-influenced splurge on household goods, spending also rose strongly for clothing & footwear (up by 2.0 per cent in the quarter) and cafes & restaurants (up 1.5 per cent). Spending on cafes & restaurants is up 8.3 per cent over the year. Maybe we need new clothes to account for our expanding waistlines?

Department stores, however, continue to struggle with spending up only 0.1 per cent in the September quarter, to be 1.5 per cent higher over the year. Spending on food -- outside of restaurants and cafes -- has also been relatively subdued.

At the state level, growth continues to be driven by New South Wales and Victoria. Our two biggest states have accounted for 97 per cent of retail trade growth over the past year, including 92 per cent in the September quarter.

That’s Australia’s economic rebalancing at work -- although at least for now South Australia and Canberra really haven’t benefited a great deal. Retail activity in Tasmania is surprisingly strong given the dire state of its labour market.

The outlook for the household sector remains intrinsically tied to conditions in the labour market. Earlier today the ABS revised estimates of the unemployment rate up to 6.2 per cent and employment has been broadly unchanged for the past six months.

Another important factor is that real wages continue to decline and a spending surge -- such as that observed in the September quarter -- requires households to dip into their savings. Savings remain elevated but have eased somewhat in recent quarters.

Wages and employment tend to be lagging factors for the economy. So spending should rise before employment follows suit; hopefully that is the case here but I’d like to see more than a single quarter of data before I was convinced that the household sector is on the rebound.

With the terms of trade declining and the unemployment rate elevated, I expect household spending to remain fairly subdued for the foreseeable future. The decline in the term of trade is potentially a once-in-a-generation income shock which will not be easily overcome in the absence of strong wage growth and softer migration. 

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