Retail therapy to the rescue but don't bank on it

Households have started to do something unfamiliar in the past few months - they've opened up their wallets.

Households have started to do something unfamiliar in the past few months - they've opened up their wallets.

Despite all the talk of a retail recession, the nation's shop owners enjoyed the strongest bounce in more than three years in February, with sales jumping 1.3 per cent.

But the key question for long-suffering business-owners - and consumers who enjoy a good shopping spree - is will it last?

In short, don't bank on it.

If you're an optimist, it might seem lower interest rates are finally doing the trick. The Reserve Bank didn't cut rates, after all, just to give people with a mortgage a free kick. It's to encourage us to spend more, which helps create growth and jobs. Recently, there's been plenty of evidence that low rates are having this effect.

Cheap debt is also causing more people to move their money out of the bank and into an investment, such as property or shares. In turn, the "wealth effect" of rising share prices and house prices makes many people feel richer, even if their incomes are unchanged, sparking even more spending.

However, a closer look at what's happening with spending suggests we're a long way from the consumption boom of the early noughties - which RBA governor Glenn Stevens has dubbed, ironically, "the good old days".

During Australia's great shopping spree between 1995 and 2005, household spending after inflation expanded by 2.8 per cent a year. Much of the spending was far from essential - called "discretionary". We were rushing out to buy things such as televisions, clothes or bulky goods.

Now, however, spending growth remains skewed towards food and eating out, rather than the types of spending we usually associate with retail therapy.

There's also a deeper reason why many experts think the bounce in spending won't last: the looming peak in mining investment. Mining might seem irrelevant to many city-dwellers but the Reserve last week said this peak was "close" and overall spending by miners would start to drag on the economy. In short, it expects Australia to hit a soft patch.

Unless some other industry can fill the gap left by mining, the RBA reckons growth this year will be weaker than its long-term average of about 3 per cent. That's why it has cut the cash rate to 3 per cent, its lowest level on record, and it keeps saying that it remains prepared to take further action.

Until there is solid evidence that we've avoided this looming growth hole, it would be premature to count on a retail resurgence.

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