Return to spender? Don't count on it

AFTER briefly flirting with thrift, are shoppers getting their mojo back? It is early days, but there have been tentative signs consumers are rising from their slumber.

For all the warnings of a retail recession, turnover on the nation's cash registers is growing at the fastest quarterly pace in almost two years. The Bureau of Statistics said retail spending rose by 1.8 per cent in the September quarter the strongest three months since November 2009, despite the backdrop of Europe's debt crisis.

There are also signs credit growth is picking up. Personal lines of credit such as holiday or car loans are normally the first to be cut in tough times, but the latest ABS figures show personal finance growing at its strongest pace since late last year.

And none of these trends takes into account last week's 0.25 percentage point cut in official interest rates. Consumer confidence was already improving from rock-bottom before the move, and for a nation obsessed with mortgage rates, lower credit costs are only likely to lift spirits further.

As the chief economist at BT, Chris Caton, said after last week's retail result: "It appears that earlier reports of the death of retailing in Australia were greatly exaggerated."

So are these early signs that retail's nightmare is over, and the bygone days of rapid spending growth are back? I wouldn't count on it, even though the figures suggest some loosening of purse strings.

To understand why, it is worth revisiting the great consumption boom between 1995 and 2005 during which household spending after inflation expanded by a blistering 2.8 per cent a year.

It was a golden era for retailers, without doubt. But it was also unsustainable, for the simple reason that our spending was growing faster than income, by about 0.75 percentage points a year.

How did we manage such a feat? Instead of relying on income earned through pay rises or investment returns, higher spending was funded by capital gains in houses and shares held in superannuation.

In the decade to 2005, booms in share prices and property sent the value of household assets surging by 6.7 per cent a year. The Reserve Bank says this was more than twice as fast as the long-term average increase in wealth, and allowed consumers to spend faster than income was growing.

Fast forward to today, and such phenomenal capital gains are unheard of. That is the key difference between the situation facing consumers now compared with the pre-GFC consumption binge: household balance sheets.

As the Reserve's statement on monetary policy highlighted on Friday, household net worth is decreasing, not rising. And that crimps spending. Thanks to a volatile share market and sliding house prices, the RBA estimates household net worth fell by 3 per cent in year to September, and most of these falls occurred in the last three months.

To be sure, disposable incomes are rising they jumped 5 per cent in the year to June, mainly thanks to wage rises. But whereas shoppers were once happy to spend all their income gains, and even go into more debt while they were at it, today's consumers have a different mindset. They've rediscovered thrift and are stashing away the windfall from pay rises in savings accounts.

Between mid-2008 and earlier this year, households saved almost all their income gains, taking the share of income saved from below zero to historically normal levels of about 10 per cent.

This embrace of saving has dragged growth in consumer spending down to basically zero once inflation was taken into account. So it is hardly surprising retailers are complaining.

However, the contraction in real spending won't last forever. Assuming incomes keep rising, it is a mathematical certainty that spending growth will resume once households reach a rate of saving they are comfortable with. It is impossible to say when consumers will find this happy rate of saving, but the more optimistic souls think we are getting close.

At more than 10 per cent of income, the savings ratio is the highest it has been in more than 20 years. It's also near the average rate of saving before the heady days of the 1990s. Some economists therefore think we're soon approaching a turning point from which spending growth can resume.

But rather than rapid spending growth funded by debt and higher asset prices, consumption should grow moderately, in line with income.

When seen against this backdrop of thrift, the signs of life in retail sales provide a glimmer of hope for the struggling sector. After inflation, growth of 0.6 per cent for the September quarter is hardly cause for celebration, but there was some good news hidden in the detail.

For one, households in the struggling NSW economy posted the fastest spending growth of all the states. This could be a sign mining boom income is finally starting to spill into the broader economy.

Consumers also appear willing to part with their cash provided the product is right. For all the talk of thrift, spending on cafes, food, liquor and home products expanded solidly in the past year.

Much fuss has also been made about the plunge in spending on discretionary products such as shoes, clothes, books and music. And there's no doubt retailers in these areas are finding business tough indeed.

But their problem is not necessarily consumer caution it's that shoppers are simply heading online and getting these goods at the best price, helped by the high Australian dollar.

All up, recent growth in retail trade suggests spending is on a gradual path to recovery, but it's not heading back to the blistering growth of the 1990s and the first half of last decade. Looking back, it's clear this spending spree was a one-off, funded by an asset-price boom that won't be repeated any time soon.

So despite the positive signs, the $240 billion retail industry might have to wait a while longer before cracking out the champagne.