Weekly Economic Briefing: Global retailers in the Australian market

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!

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.

Global retailers in the Australian market

Retail sales in the Australian market moved to a slower growth trajectory through 2018, with our willingness to spend affected by the downturn in both the housing and share markets.

Despite the tougher conditions, new retailers continued to enter the Australian market, and existing retailers expanded their operations. According to the recently released Global Powers of Retailing 2019 report, 39 of the Top 250 global retailers operated in Australia in 2018 – one more than in 2017.

This year’s report reveals that, while the global and local retail environment continues to present challenges, the world’s top 250 collectively still achieved strong growth in FY18, generating US$4.53 trillion in revenues, up 5.7% year-on-year. Three Australian-based retailers – Wesfarmers, Woolworths and JB HiFi – all remain in the Top 250 – JB has moved up, from 218 to 181, while Wesfarmers and Woolworths maintained their top 25 placings, at 21 and 22 respectively (Wesfarmers unchanged, Woolworths up one place).

The year saw 11 movements in and out of the Australian market by the world’s Top 250 retailers. The big entries came in the form of large Chinese ‘non-store’ retailers in JD.com and Vipshop Holdings. On the other side, Gap, Toys “R” Us and Forever 21 were high profile exits.

While US retailers continue to be over-represented (33% of the Top 250 retailers operating in Australia are headquartered in the US), this has dropped from 45% last year (see chart below). Despite Chinese retailers only comprising 5% of the Top 250 operating in Australia, the two entries this year took out two of the top three places for fastest growing retailers in the FY2012-2017 period. We expect this will continue over coming years, particularly with the rise of omni-channel marketplaces throughout Asia.

Chart: Country of origin for Top 250 retailers operating in Australia

This is a break from historical trends, in that retailers in the Asia–Pacific region have been relatively slow to invest in international operations. On average, they operated in just four countries, compared with 9.5 countries for the entire Top 250 group, and nearly half of whom operated only within their home country. But it’s not just Asia–Pacific retailers set for a windfall, with Australian retailers set to benefit from their operations in the region as well. The growth in the Chinese middle class, combined with the demand for Australian products, presents significant untapped opportunity for many Australian operators.

In a sign of growing corporate responsibility, the year ahead offers the opportunity for Australian retailers to do well by doing good. Consumers increasingly expect that brands be accountable for sustainable manufacturing practices, transparency and reducing their overall carbon footprint. As seen from the recent findings of the financial services royal commission, business leaders more than ever need to take the lead on setting a tone at the top that puts the interests of consumers, as well as society more broadly, front and centre.

For more information on the Australian brief, please contact co-authors David Rumbens and Harry Murphy Cruise.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: https://blogs.deloitte.co.uk/mondaybriefing/

  • After a dreadful end to the year global equity markets got off to a flying start in 2019. The US S&P 500 index is up by 10% so far this year, having fallen by 16% in the first three weeks of December.
  • The switch from gloom to cheer reflects a major policy shift by the US Federal Reserve (the Fed).
  • Last autumn markets were braced for the Fed to carry on raising rates through 2019, even though rates had already risen from 0.25% to 2.5% since late 2015. The Fed was in hawkish mode and way ahead of other central banks in tightening monetary policy.
  • That hawkishness coupled with signs of a weakening in the global and, increasingly, US activity, caused December’s equity sell-off.
  • Since then the Fed has changed course signalling that the tightening cycle may already be over. Far from expecting the Fed to hike rates markets think the next move will be a cut. Lower interest rates boost growth and the current value of future dividend income; it’s no surprise that the Fed’s volte-face has buoyed equities.
  • The Bank of England (BOE) has followed the Fed’s lead, pulling back from its rate-rise plans citing a weaker global backdrop and Brexit risks. The European Central Bank(ECB) has chimed in saying it would keep interest rates at their current level of zero percent through the summer of 2019, “and longer, if necessary”.
  • The view in financial markets now is that interest rates in the US, the UK and the euro area will stay on hold through this year. Meanwhile the consensus among economists is that growth in the rich world will slow modestly this year, with growth of 1.3% in the euro area, 1.4% in the UK and 2.5% in the US.
  • These numbers are respectable and do not set alarm bells ringing. Yet the world is awash with risks from trade wars to a slowing Chinese economy and asset bubbles. All too often what looked likely to be a modest downturn has turned into something far more severe. What tools do the authorities have to prop up demand should things turn nasty?
  • The standard response would be to cut interest rates. With rates at 2.5% the US has a fair amount of headroom to do so. The UK, at 0.75%, has less scope and with euro area rates around zero the ECB is running on empty.
  • More controversial and suggestive of mounting risks to growth, would be to re-start quantitative easing (QE). The Fed has an advantage on this front because it started tightening early. The Fed is the only central bank that is unwinding QE, selling assets acquired during the period of extraordinary monetary ease. Slowing or stopping the pace of US quantitative tightening is a subtle form of monetary loosening that is available to the Fed, but not to the ECB and the BOE, who have merely stopped the net purchase of assets. Europe’s central banks would need to re-start their now- terminated programmes of QE, something which in policy terms would be akin to pressing a big red button labelled ‘Crisis’.
  • With monetary policy ammunition running low it would be natural to expect the government to bear more of the burden of getting growth going in the event of a downturn. Governments are running much higher levels of debt than ten years ago, suggesting they too are constrained. But borrowing costs are low and in an uncertain world, investors seem to have almost inexhaustible appetite for the debt of large, Western governments.
  • Last week the Financial Times(FT) reported that euro area governments have started to reverse years of austerity with most countries adopting expansionary fiscal policies which should bolster growth. In the UK the government says that it would be prepared to increase spending in the event of a Brexit shock.
  • The US is in a different position. It enacted huge tax cuts in early 2018, stimulating the economy when it was close to full capacity. By the end of this year the stimulus from the tax cuts will fade just as the economy is in need of a boost. Mr Trump’s recourse last week to emergency powers to fund his border wall suggests he might struggle to get money from Congress to help bolster growth.
  • Yet my sense is that the US is probably better placed to counter a downturn than the euro area.
  • The Congressional battle over funding for Mr Trump’s wall has certainly been toxic. But it says little about the willingness of the Democrats to fund infrastructure projects in the event of a major downturn. Indeed, in the 2016 election one of the few areas on which Mr Trump and Ms Clinton agreed was the case for a substantial increase in public infrastructure spending.
  • Germany has the scale and scope to ease fiscal policy in a way that would boost the whole of the region. But it is resistant to doing so, favouring strong public finances. Italy and France arguably have greater need for fiscal stimulus but their finances are weaker than Germany’s. In the case of Italy state indebtedness connects to the fragile condition of the banks, which are heavily invested in Italian government debt.
  • America is not alone in facing tensions on fiscal policy. The recent stand-off between Brussels and Rome over Italy’s plans for deficit-financed spending attests to the tensions between the rules of the single currency and the preferences of member states. Those rules limit government deficit to 3% of GDP and debt to 60% – something which places a constraint on the ability of some governments to boost their economies.
  • The euro area slowdown kicked in without the ECB even having tightened monetary policy. That’s worrying, not least because it means that the ECB is facing a downturn with interest rates at zero. The downturn in the euro area is advanced and deflationary risks look greater than in the States. (Underlying or core inflation in the US is twice euro area levels.)
  • At 2.5% there’s plenty of scope to lower US interest rates. And the Fed can quietly ease policy by slowing the pace at which it sells assets. The ECB would need to restart its QE programme. That would be very big news.
  • As the euro area recovered in 2016-17 concerns about the long-term challenges of low growth and an incomplete monetary union faded. Those problems have not gone away. The way in which President Macron’s reform programme ran up against the gilets jaunes movement shows how things can change. May’s European Parliamentary Elections will provide an important EU-wide test of the public mood.
  • The UK is, of course, on a different path. An abrupt or disruptive Brexit would generate intense pressure on the government and the BOE to ease policy. Faced with the risk of a sharp slowdown, or a recession, I suspect the UK authorities would not sit on their hands and do nothing.
  • The slowdown in Europe and the US is coming through a little faster than expected. It looks manageable and orderly but then most major downturns start out that way. Policymakers would be wise to be thinking about how they’d react if things were to turn nasty.

OUR REVIEW OF LAST WEEK’S NEWS

The UK FTSE 100 equity index ended the week up 2.3% at 7,237, hitting a four-month high as investor optimism was buoyed by hopes of progress in trade talks between the US and China.

Economics and business

  • US president Donald Trump signed a spending bill to avert another government shutdown and declared a national emergency to bypass Congress and secure funding for the border wall
  • US retail sales slumped unexpectedly by 1.2% in December from the previous month, the sharpest decline in almost a decade
  • UK inflation fell to 1.8% last month from 2.1% in December, falling below the BOE’s target for the first time in two years
  • The UK economy grew by 1.4% last year, the slowest pace of expansion in six years after a sharp contraction in December
  • UK retail sales rebounded in January above expectations after a sharp decline in December
  • Germany narrowly avoided a recession in the second half of 2018; the economy flat lined in the fourth quarter following a 0.2% contraction in the third
  • Euro area industrial production fell sharply in December, with output down 4.2% from a year earlier, the steepest decline since 2009
  • Hungarian prime minister Viktor Orbán said that mothers with four children or more will be exempt from paying income tax for good, in an attempt to reverse the country’s population decline
  • China had fewer births in 2018 than in any year since 1961; the birth rate has failed to respond to the relaxation of the one child policy in 2014
  • French president Emmanuel Macron’s great national debate – two months of public meetings to defuse protests – is halfway through, with his approval rating up sharply from last year’s low
  • US online retailer Amazon abruptly cancelled plans to build a satellite headquarter in New York, citing growing opposition from local policymakers
  • Global measles cases rose 50% to 2.3m per year with some blaming the rise on a widening anti-vaccine movement
  • Airbus is to end the production of the A380, the world’s largest passenger aircraft, in 2021 after its main customer Emirates airline cut its order

Brexit and European politics

  • British prime minister Theresa May suffered another Commons defeat after MPs voted down a motion endorsing her government’s Brexit negotiation strategy
  • Spanish prime minister Pedro Sanchez called for a snap general election on April 28, after his budget bill was voted down by the Spanish parliament last week
  • Dutch prime minister Mark Rutte said that a no deal Brexit would be “devastating” for the UK
  • BOE Monetary Policy Committee member Gertjan Vlieghe said, “in the case of a no-deal scenario I judge that an easing or an extended pause in monetary policy is more likely to be the appropriate policy response than a tightening.”
  • The European Commission rebuffed calls from EU asset managers to continue trading dual-listed shares in London after a no-deal Brexit
  • Major European manufacturers urged the EU to either make a clean break from the UK on March 29 or delay Brexit by six to 12 months, as a short delay would undermine their contingency plans
  • The FT reported that moderate Labour MPs are plotting to form a breakaway political party within weeks if Jeremy Corbyn refuses to back an amendment calling for a second referendum
  • DP World, the largest investor in British ports, said that it was ready to boost capacity by 30% at its Essex terminal to ease congestion elsewhere should the UK crash out of the EU without a deal
  • More than 30 groups from across the food and drink industry wrote to the government to suspend work on reforms from recycling to forest protection, as their members focus on contingency planning for a no-deal Brexit

And finally… A US TV host admitted live on air that he had not washed his hands in ten years. The Fox News presenter Pete Hegseth told viewers that he had not cleaned his hands in a decade because “germs are not a real thing” – hogwash


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