Weekly economic briefing: The changing retail landscape – lessons from the US

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.

The changing retail landscape – lessons from the US

Household budgets are under pressure as wage growth remains subdued and as the prices of some non-discretionary household spending items rise relatively strongly. But despite these somewhat challenging conditions, Deloitte Access Economics’ latest Retail Forecasts report showed that retail spending improved in 2017-18, with consumers winding back on saving to support spending activity. This isn’t, of course, a sustainable basis for spending growth. A further pick up in retail spending is dependent on stronger wage growth, which may take some time to eventuate.

This challenging landscape for Australian retailers has some parallels in the US (The great retail bifurcation) where retail performance can differ greatly depending on the market segment.

Chart 1. US retail performance

Source: Deloitte Insights

Chart 1 shows that price-based retailers (those selling at lowest possible prices) and premier retailers (those offering highly differentiated products/experiences) in the US have experienced significant improvement in revenue streams over the past five years, growing by 37% and 81% respectively. Meanwhile, balanced retailers (offering value through sales and deals) have struggled, with revenue rising by just 2%. And it’s not just revenue where the retail experience differs, with store openings also skewed towards price-based and premier retailers.

Similarities between US and Australian household finances suggest the experiences of the US retail sector may be informative for Australian retailers. Income growth in both countries has been improving over the past few years, though not all groups have benefited. Australian nominal income for high-income households nearly doubled between 2007 and 2016, while the bottom 80% of households experienced either modest growth or a decline in nominal income. There has also been significant disparity in gains from wealth by income cohort over recent years.

While Australia hasn’t experienced the same degree of income and wealth divergence as the US, there are still some similar patterns emerging. Low-income households are receiving less of the income boost and are more impacted by rising prices for non-discretionary goods and services, leaving less left over for retail spending. Meanwhile, high-income households have a much stronger financial position than 10 years ago, which is supportive of stronger retail spending activity.

The result for retailers? The balanced retailers in the middle are increasingly getting squeezed out as more consumers move into either the price-conscious or the premier groups.

Retailers need to consider analysing their value proposition through the lens of different consumer segments, and their exposure to income and, particularly, wealth drivers seen over recent years. Clearly, not all retailers are equally exposed.

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

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/

Why we shouldn’t tax robots

  • Economists of all stripes would agree that investment and the application of technology drive economic activity. For decades governments around the world have made strenuous efforts to encourage investment and new technologies. Last year this orthodoxy came under fire from an unexpected source.
  • In an interview with Quartz Bill Gates made the case for taxing robots at the same rate as human workers: “Right now, the human worker who does, say, $50,000 worth of work in a factory, that income is taxed and you get income tax, social security tax, all those things. If a robot comes in to do the same thing, you’d think that we’d tax the robot at a similar level.”
  • This is a radical idea, the more so coming from someone whose fabulous wealth came from Windows, a technology which transformed the nature of work. So, what is the rationale for introducing a robot tax now?
  • If the rate of technological change is increasing it seems likely that the rate of job destruction is also likely to rise. Machine learning, super-computers, autonomous vehicles and robots have the capacity to destroy or remake whole sectors. To its supporters a robot tax could slow the pace of traumatic change and fill the gap in government revenues left by rising unemployment. The revenues could be used to support the incomes of displaced workers and retrain them.
  • The machines of the future will do what the machines of the past did – displacing people, raising efficiency and boosting growth. But some fear that the coming wave of change will destroy far more jobs and further widen the gap between the incomes of skilled and unskilled workers.
  • Mr. Gates’ proposal for a robot tax has been endorsed by the Nobel prize-winning economist, Robert Schiller. The European Parliament has discussed, though rejected, the idea of such a tax. But most economists, this one included, are sceptical. Here’s why.
  • The financial crisis has been followed by a period of slower growth in GDP and productivity across the industrialised world. Raising productivity is arguably the greatest problem facing western policymakers. Yet a robot tax would penalise exactly the sort of high tech investment that is needed to reboot productivity growth. It would make the West’s productivity problem worse.
  • The advocates of a robot tax seem to believe that businesses are likely to spend too little on hiring and too much on machines. But if anything, the reverse seems to be the case. There’s been no investment boom in the West and many corporates have prioritised cost control, share buybacks and paying dividends over investment. Employment, by contrast, has boomed. The defining feature of the US, Germany and UK economies in recent years has been the rapid pace of job creation and collapsing unemployment rates.
  • The UK’s productivity performance in recent years has been especially awful. My hunch is that the UK has too little investment and too many low paid, low productivity jobs. The UK may be a world beater on job creation, but it lags behind other industrialised countries on investment spending and the deployment of robots.
  • The risk is that a robot tax would slow innovation and support the creation of low productivity, low-skilled jobs. It’s hardly an inspiring vision of the future.
  • There is also a definitional problem. Computer components are used in innumerable machines, from jet engines to dishwashers. Defining when a machine become a robot won’t be easy. Just remember the legal battle to settle the vexed question of whether, for the purposes of VAT, a Jaffa Cake is a cake or a biscuit. Moreover, many labour-displacing innovations, such as off-shoring or centralising functions, are low or no-tech. If robots are to be taxed for destroying jobs, shouldn’t these be too?
  • My guess is that for these sorts of reasons we’re unlikely to see a race to impose robot taxes.
  • Yet the debate about robot taxes forms part of a wider discussion about US incomes. The last 40 or so years have seen a worrying stagnation in the incomes of lower skilled, less educated American workers.
  • Technology has played a role, but so too has the decline of manufacturing, globalisation and a growing wage premium to skills and knowledge. A robot tax may not be the solution, but its advocates seeks to address real problems. The fact that America, the world’s richest economy, has been unable to spread the gains of growth to lower skilled workers, raises profound questions. It’s a subject to which we will return later this year.

PS: We recently wrote a briefing on the value of a university degree. Last week the Organisation for Economic Cooperation and Development (OECD) published a report which found that one in four graduates are working in jobs which don’t require a degree. Andreas Schleicher, the OECD’s director of education and skills said that too many graduates are emerging from university without basic numeracy and literacy skills.

PPS: We have previously written about the increase in take up of fixed rate mortgages in the UK. Figures released this week show the strongest July for remortgaging in more than a decade as households locked in low rates prior to the Bank of England’s 25bps rate rise in August. Separately, the FT reports five-year fixed mortgage deals have overtaken two-year options as borrowers opt for certainty in response to rising interest rates.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 0.4% at 7,304.

International economic briefing by Ian Stewart

Economics and business

  • UK GDP growth accelerated to 0.6% in the three months to July, fuelled by a recovery in construction and retail
  • UK wages grew by 2.9% in the three months to July on an annual basis, the fastest pace in over three years
  • The UK manufacturing sector added 145,000 jobs in the five years to March 2018, its longest period of sustained employment growth in 40 years
  • Christine Lagarde, managing director of the IMF, warned that escalating US-China trade tensions could deliver a “shock” to emerging markets
  • The Turkish central bank raised interest rates to 24% from 17.75% as it attempted to address its soaring inflation and plummeting currency
  • Turkey’s president Erdogan called high interest rates a “tool of exploitation” hours before the central bank raised rates
  • Turkish authorities banned the use of foreign currency in the real estate market in a measure designed to curb the falling lira
  • The Bank of England’s (BoE) Monetary Policy Committee voted unanimously to keep interest rates constant at 0.75%, while expressing concern regarding “greater uncertainty” around the Brexit negotiations
  • The European Central Bank re-affirmed its plan to end its quantitative easing programme by the end of the year, adding that it would halve its net asset purchases to €15bn from October
  • Euro area labour costs rose at the fastest pace in nearly six years in Q2, reflecting strengthening EU labour markets and increases in employment taxes
  • Sales of used vehicles in Ireland soared 10% in July from the previous year as the British clampdown on diesel cars causes a surge in second-hand exports
  • JPMorgan predicts that a financial crisis is likely to occur in 2020 due to reduced liquidity in financial markets
  • New York overtook London as the world’s most attractive financial centre, according to the Z/Yen global financial centres index

Brexit and European politics

  • EU chief Brexit negotiator, Michel Barnier, said that it could be possible for the UK and the EU to reach a Brexit deal within six to eight weeks
  • Mark Carney, governor of the BoE, said a no-deal Brexit scenario could include a fall in house prices of 35% over three years, a fall in sterling and a rise in interest rates, inflation and unemployment
  • He also warned that the BoE would not be able to support the economy by cutting interest rates as it did after the 2016 Brexit referendum
  • The UK government confirmed that Irish citizens in the UK will continue to benefit from their current rights under the Common Travel Area (CTA), including the right to work, study and vote, in the event of a no-deal Brexit
  • Rating agency Moody’s said, “prompt and forthright policy action [to avoid a Brexit no-deal] could avoid material damage to the UK’s economic and fiscal strength”
  • UK prime minister, Theresa May, said the UK government may reconsider its position on the £39bn financial settlement with the EU in the event of a no-deal Brexit
  • Sweden’s parliamentary elections resulted in political deadlock with the ruling centre-left party holding just one more parliamentary seat than its centre-right rival, resulting in coalition talks for a working government

And finally…

  • Archaeologists in northern Israel have discovered what they believe to be the world’s oldest site for alcohol production – a cave where the hunter-gatherer Natufian people are believed to have made a beer-like beverage some 13,000 years ago – pale-aleontology

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