Retail therapy to the rescue but don't bank on it
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.
Frequently Asked Questions about this Article…
Retail sales bounced by 1.3% in February, driven largely by cheaper borrowing costs after Reserve Bank rate cuts. Lower interest rates have encouraged households to spend more and pushed some savers to move money into investments like property and shares, helping boost consumer activity.
According to the article, you shouldn’t count on a sustained retail resurgence. The spending rise is uneven (more on food and eating out than big-ticket discretionary items) and the Reserve Bank warns a looming peak in mining investment could start to drag overall economic growth down.
Lower interest rates make debt cheaper, which encourages people to spend more and to shift money out of bank deposits into investments such as property and shares. That can create a ‘wealth effect’—rising asset prices make people feel richer and spur further spending.
The ‘wealth effect’ is when rising share and house prices make households feel wealthier, even if incomes haven’t changed. That perceived increase in wealth can prompt more spending, helping retail sales and the wider economy—at least while asset prices keep climbing.
Between 1995 and 2005, household spending after inflation grew by about 2.8% a year, driven largely by discretionary spending on items like TVs, clothes and bulky goods. The recent bounce is weaker and skewed toward essentials like food and eating out, not a broad discretionary spending boom.
Mining investment has been a major driver of spending in parts of the economy. The Reserve Bank says mining investment is close to a peak, and when miners cut back on spending it can drag on overall growth—making it harder for retail and other sectors to fill the gap.
Watch monthly retail sales data (and the split between discretionary items and essentials), Reserve Bank commentary and cash rate moves, signs of continued asset-price gains (the ‘wealth effect’), and trends in mining investment and jobs—these signal whether spending is broad-based or just a short-term blip.
The RBA has cut the cash rate to 3%—its lowest level on record—to support growth and spending, and says it’s prepared to take further action if needed. For investors, that means cheaper borrowing costs may continue to support asset prices and consumer spending, but also signals the RBA is worried about a potential soft patch if other industries don’t offset a slowdown in mining investment.
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