Retailers have sailed around a perfect economic storm

It’s not smooth sailing for Australian retailers at the moment by a long shot – but it could have been a whole lot worse.

The rule book of Australia’s retail landscape is being rewritten fast as new players with deep pockets and new business models rush to grab their piece of the pie of one of the world’s premier retail markets – one that, relative to the rest of the globe, boasts high incomes, good growth and good potential.

Retail’s problems of the moment aren’t particularly a function of a lack of spending by families. Given really weak wage growth, retail spending has been pretty strong – strong enough in fact to see savings rates halved over the last five years, as families increase their spending faster than their incomes.

Rather, the main problem is more players trying to steal a piece of the same pie. That’s pressured pricing and profits in a way that’s been particularly problematic for existing retailers.

What could have gone even more wrong

Yet it could have been worse. After all, the structural changes in Australia’s retail landscape were always going to happen – big global players were always going to want a piece of the local action, and changed technologies were always going to see new players nip at the heels of bricks and mortar. Yet there was a notable chance these two structural changes around competitor entry and new business models would be having their peak impact on retail at the same time as the economy served up a phase of real weakness in retail spending.

There’s a reason why savings rates have halved in the last five years. It is because housing prices and share prices have both roared upwards, making families feel wealthier to the extent they’ve been willing to take that love to the shops, with household expenses growing consistently faster than household income for a number of years now.

This phase was always part of the cunning plan devised jointly by the Reserve Bank and the Federal Government, with China’s boom losing its earlier strength, Australia needed to fill a hole in our economy. We did so by shifting interest rates lower, which shifted housing wealth up substantially higher. In turn, that made us happier to shop at the shops and also to build new homes and renovate old ones.

That willingness to spend helped the economy through what would otherwise have been a tougher patch in the years since 2012 as China’s economy slowed. But there was a risk that particular tightrope walk would come a cropper at the same time as Amazon and others arrived on Australia’s shores, with housing prices running into bother before wage growth lifted.

In other words, there was a risk the economic drivers of retail spending fell over at the same time as structural challenges to the local retail markets were at their sharpest.

What’s gone right

The good news is that risk is now much smaller than it used to be, both because housing markets have proved to be stronger for longer, and also because the pre-conditions for wage growth in Australia are increasingly in place.

From a global viewpoint there have been two big surprises through 2017 – the world economy has been better than most expected, and yet global inflation has remained remarkably weak. The better world economy is helping to deliver better business profits here in Australia and has also led to a relatively sharp lift in job growth. Those are the two things that needed to happen to help wage growth in Australia to pick up – businesses needed to be making more money and to be putting more people into work. Both those things are now happening, suggesting today’s record low wage growth will gradually begin to climb from here.

Even better still, at the same time the weakness evident in global inflation is why the US Federal Reserve is now looking rather less likely to be raising rates as far or as fast as previously expected and why the same is true of the Reserve Bank here at home. And with inflation and interest rates looking less of a risk, the same is true of Australian housing markets.

The forecast

That may be cold comfort – but it is a comfort nevertheless. Retailers are navigating some tricky shoals, but at least it now looks as if wage growth will recover before housing jitters send the wobbles through the willingness of families to spend.

That’s a welcome degree of wriggle room at a time when it is much needed.

Article first published in the Australian Financial Review on 1 November. Chris Richardson was a key note speaker at the AFR National Retail Summit, in association with Deloitte.


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