Weekly economic briefing: Who benefits from online disruption?

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Who benefits from online disruption?

Australia’s retail sector continues to face difficult conditions according to Deloitte Access Economics’ latest quarterly Retail Forecasts report. High levels of competition, increasing digital disruption, and weak household income growth is limiting growth in prices and spending. Strong population growth is good news for the sector, along with glimpses of improving wages, but risks remain around slower wealth accumulation, high household debt, and increased online disruption.

Amid an increasingly competitive sector, it is consumers who are the primary beneficiaries of better service, more accessible products and lower prices. But technology has also created some great opportunities for domestic retailers who can expand their service offerings outside traditional retailing channels.

Chart 1: Online sales growth and share of total retailing

Source: NAB online retail sales index

Despite a clear moderation in the rate of growth, spending online continues to significantly outpace that experienced by traditional bricks and mortar retailers. With more retailers opening up or improving their online channels, consumers have responded and picked up the pace of their online switch.

And it’s not just younger generations leading the charge. While baby boomers have been slower to embrace digital options, a reversal to this trend may be on the cards. The increasing online presence of the over 65s cohort provides opportunities for major food retailers in particular, which account for almost a third of their online spending.

Retail outlook

Retail sales continue to be supported by solid growth for non-food volumes, with food spending lagging behind. Real retail turnover expanded 2.6% in the year to March 2018, driven by a 4.4% gain in non-food spending over the same period (compared to 1.1% growth for food spending). Categories closely tied to the housing market have benefited from rising property prices, and weak household incomes have limited spending on food.

Looking forward, the recent food/non-food discrepancy is expected to unwind as property prices cool and wages start to pick up. Overall real retail turnover is expected to lift modestly from 2.4% growth in 2017-18 to 2.6% growth in 2018-19.

The Federal Budget provided some welcome news for Australian consumers and retailers. If they get through the Senate, income tax cuts are estimated to put around $13.4 billion back into consumer pockets over the coming four years. This would be a welcome development for household budgets amid an environment of weak wage growth, and retailers are likely to be a major beneficiary of consumers’ improved income position.

Demand for retail space is solid, but the growth of online spending poses a risk to the future. The greater entry of international brands to Australia’s retail landscape is supporting demand, keeping a lid on vacancy rates and supporting rental return. However, there is some weakness in the investment pipeline as demand softens. Instead, major retailers are looking for prime real estate for flagship stores and combined retail and dining precincts. This trend will likely accelerate in the future as consumers shift further towards online platforms, reducing demand for sub-prime retail space.

For more information on the Australian brief, please contact co-authors David Rumbens and Emily Dabbs.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

UK Update

  • UK activity has softened since the vote to leave the EU. The UK slowdown has been pronounced, though less severe than widely predicted on the eve of the referendum, and has left the UK slowing into a global recovery.
  • I’ve been relatively positive about the UK and was surprised by the weakness of first quarter growth, with GDP expanding by 0.1%, the slowest pace in more than five years. (Trend growth is around the 0.4%/0.5% mark). Bad weather may have played a role in the slowdown, but household spending and business investment have softened, with Brexit seemingly the main driver. The 2016-17 devaluation of sterling has fuelled inflation and squeezed the consumer and uncertainty seems to be weighing on business sentiment.
  • The outlook for UK in the next year will be heavily influenced by the outcome of the Brexit negotiations and the pace of global growth.
  • Recent events testify to the divisions within and between the UK’s parliament and the Government on the desired outcome of the Brexit process. At its heart lies the question of the extent to which parliament should take back control of the UK’s exit if it rejects the proposals put forward by Mrs May’s government.
  • The next stage in the negotiations is the European council meeting on June 28-29th. This is supposed to serve as a prelude to the start of the ratification process for the terms of the UK’s withdrawal in October. From the UK side, that ratification would involve votes in the Commons and the Lords. If there is no agreement that ratification can start in the Autumn then the BBC speculates that an emergency EU summit might be necessary in November. The fall back option is for a deal to be struck at the EU summit on 13-14 December.
  • Recent developments have created new uncertainties and have been widely interpreted as both raising the chances of the UK remaining in the EU’s Customs Union or, at the other end of the spectrum, a no-deal exit on 29th March 2019. It is a sign of the times that last week the Economist Intelligence Unit assigned a 10% probability to Mrs May being replaced by a “pro-Brexit” candidate as Prime Minister and a 30% probability to the Conservatives fighting and winning a General Election on a pro-Brexit platform.
  • Events are moving fast and uncertainties are legion. But my hunch is there probably will be a deal, the UK will leave the Customs Union and the transition period will last to the end of 2020.
  • For most of the last year a YouGov poll of voting intentions has shown a small Labour lead. Despite Brexit ructions the polls have, of late, become marginally more favourable to the Conservatives. The latest poll, carried out on 11 and 12th June, shows 42% of voters saying they would vote Conservative and 39% supporting Labour.
  • Turning to the global scene the momentum of the euro area’s strong recovery has softened since the start of the year. Economists have been nudging down their forecasts for euro area growth and the German Ifo Index, a bellwether of the strength of the region’s economies, has fallen from the all-time highs seen at the start of the year.
  • By contrast the US recovery has moved up a gear. In a sign of growing confidence, the Federal Reserve raised US interest rates last week for the seventh time since 2015. The Trump administration’s fiscal stimulus package is a shot in the arm for an already entrenched recovery and the Fed is now predicting it will raise rates twice more this year.
  • This opens up an unusual divergence between UK and US monetary policy which have tended to move in sync. The Fed has gradually raised rates from a low of 0.25% to today’s 2.0% while the UK rate stands at 0.5%, the level set nine years ago at the height of the financial crisis. The gap between US interest rates and UK rates is wider today than at any time in the last 35 years.
  • We are likely to see the global economic upswing peak towards the end of this year, with growth slowing probably modestly next year.
  • UK growth seems likely to pick up from the first quarter low, helped by a marginally firmer performance from the consumer sector. There are more people in work now than ever; unemployment is at just 4.2%, the lowest level in 43 years and the economy continues to create jobs, with 343,000 new employees since the start of 2018.
  • A drop in inflation has resulted in UK real wage growth turning positive for the first time since last April. The Bank of England’s Agents Survey shows businesses reporting elevated levels of recruitment difficulties, which are likely to bolster wage pressures. Perhaps surprisingly, consumer confidence has risen from the four year low seen last December.
  • Official manufacturing output data, which had seen a boost due to sterling depreciation, recorded a sharp fall in April and business confidence is subdued. However, the latest Purchasing Managers surveys for May paint a somewhat brighter picture for services, construction and manufacturing sectors.
  • The UK has had a tough start to 2018. It looks like we will see better, though sub-trend growth, through the second half of the year. With the moment of truth approaching on Brexit the degree of uncertainty around the outlook is high.

OUR REVIEW OF LAST WEEK’S NEWS

PS: We recently wrote about the new Italian government’s plan to boost the economy using fiscal policy. The country’s finance minister has since said that the reduction of Italy’s debt ratio was “one of the government’s explicit goals”. So how can the government borrow and spend more without breaking EU deficit rules? One of the government’s ideas is to issue ‘mini-BoTs’, small (euro) denominated, non-interest-bearing Treasury bills. They would effectively be government IOUs, used by the bearer to settle tax debts or to pay for goods from state-controlled companies. To supporters, the mini BoT is an ingenious device which will get around EU borrowing controls and boost the Italian economy. To critics, the mini BoT undermines the euro and could lead to Italy’s exit from the single currency.

The FTSE 100 ended the week down 0.6% at 7,634.

International economic briefing by Ian Stewart

Economics and business

  • The US announced tariffs on $50bn of Chinese imports and Beijing responded by announcing countermeasures of the same scale
  • EU governments have backed tariffs on €2.8bn of US imports, following the US’s imposition of tariffs on EU steel and aluminium imports
  • The G7 summit ended in disagreement after the president Trump refused to sign a major communique on the future of the global trading system
  • Italy’s new populist government threatened not to ratify the EU’s trade deal with Canada as the country’s agriculture minister claims it does not protect the nation’s farmers
  • US inflation accelerated to 2.8% in May, the highest rate since February 2012
  • The US Federal Reserve raised interest rates by 25bps and set out a course for two further increases this year
  • The European Central Bank announced it will end its quantitative easing programme by the end of the year
  • Euro area’s industrial production fell 0.9% from March to April, the fourth decline in the last five months
  • UK’s manufacturing output in April registered its biggest monthly decline for five-and-a-half-years
  • UK listed firms will be required to publish and justify the pay gap between chief executives and their average staff salary from 2020
  • Oslo’s Centre for Economic Research claims IQ scores of young people have started to decline, having risen steadily since the Second World War
  • Universities provide poor value for students and taxpayers according to a House of Lords report which says, “Many graduates appear to be in jobs which do not require degree-level education”
  • The UK courts ruled that plumbers can be classified as employees rather than self-employed, in a landmark case for workers’ rights in the ‘gig economy’
  • The UK pay gap between older employees and those under the age of 30 has risen by 50% over the past two decades, according to the Trades Union Congress

Brexit and European politics

  • The House of Commons rejected the Lords’ amendment to the EU Withdrawal Bill that Parliament should have “a meaningful vote” on the final Brexit deal
  • Theresa May said she would propose a new amendment to key Brexit legislation to give MPs a “real say” over any plan to leave the EU without a deal
  • Jeremy Corbyn suffered a significant rebellion from supporters and opponents of Brexit in his own party
  • 90 Labour MPs announced their support for the ‘softest’ form of Brexit, EEA membership
  • The European Commission (EC) proposed to nearly triple the funding for migration and border management in the next long-term EU budget
  • The EU warned that the UK’s proposal for a temporary custom “backstop” would “lead to a hard [Irish] border” as it “does not cover regulatory controls”
  • UK manufacturing sectors “risk becoming extinct” without a UK-EU customs union, according to the president of the CBI

And finally…

  • Bulgaria agreed to spare the life of Penka the cow after plans to kill her for crossing European Union borders without paperwork triggered an international outcry – free moovement

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