Weekly Economic Briefing: Retail Forecasts – running on empty

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.

Retail Forecasts: running on empty

According to Deloitte Access Economics’ latest quarterly release of Retail Forecasts, retailers are still upbeat heading into the Christmas period after a relatively good year, both in terms of sales and profits. But it’s also been another year where the household savings rate has tumbled, as income growth fails to keep up with spending growth. That has been fine while property prices boomed, but with prices now falling, consumers will be more constrained when it comes to spending on retail goods.

Wage growth is needed as the housing market deflates

Australian households face a potentially sizeable reduction in wealth as the property market falls. Property prices have now dropped for 13 consecutive months, with falls in Sydney and Melbourne driving national losses. Tighter credit availability has reduced demand, especially among investors. This, combined with a continued increase in housing supply, is exposing what was significant over-valuation.

While tighter labour market conditions have helped wages edge higher, this is a slow process. To offset the drag to consumer spending from lower Sydney and Melbourne property prices, labour income will need to keep rising.

Spending shift from consumer durables to necessities

With the housing market in a downswing, we’re moving home less often, and soon there will be fewer new homes built. That gives us less reason to upgrade consumer durables.

With that, we expect consumer spending to swing towards food, clothing, smaller items and services and away from big ticket spending. That might even out across the retail sector but there will be individual winners and losers.

Weak retail operating conditions

The retail industry is one of the toughest industries in Australia to operate in. The NAB Business Conditions index indicates that operating conditions in the retail industry are the weakest across all industries, and worryingly they continue to deteriorate. The retail conditions index is well below the industry average, and reflects the only industry to be experiencing worsening conditions.

Chart 1:  Business conditions, October 2018

Source: NAB Monthly Business Survey, October 2018

Intense competition and an extended period of subdued consumer demand has forced retailers to look at new technologies and efficiency savings in delivering their products to market. As such, the retail industry has experienced the strongest growth in productivity across the market sector, reflecting developments in how businesses are operating.

Key developments include changes to opening hours, increased online retailing and the adoption of less labour intensive technology, such as self-serve checkouts, automated ordering and shelf-ready packaging at brick-and-mortar stores.

One by-product of these trends is that retail property markets are hurting. New buildings in retail have dropped sharply; instead the investment dollars are going towards digital.

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/

Our Christmas Quiz offers an eclectic test of knowledge of economics and business. The answers and a brief explanation of the factors at work are at the end of this note.

1. Much of the modern Christmas was created in the nineteenth century. Match the person to the Christmas innovation.
a) The invention of the Christmas cracker in 1848
b) The first commercial Christmas cards in 1843
c) The Christmas tree’s arrival in the UK in 1800
d) A Christmas Carol, written in 1843

i) Queen Charlotte, the German wife of George III
ii) Sir Henry Cole, prolific Victorian inventor
iii) Tom Smith, a leading confectioner in Victorian England
iv) Charles Dickens

2. Three of the following were removed from the basket of goods used to calculate the UK consumer inflation index this year and one was added. Which were removed?
a) Prepared mashed potato
b) ATM charges
c) Action cameras
d) Bottles of lager at a nightclub
e) Women’s exercise leggings
f) Pork pies

3. According to Good Housekeeping magazine the cost of a Christmas dinner, including turkey, vegetables, mince pies, Christmas pudding, cake and brandy butter, has risen by 25% in the last two years. Rising prices reflect the effects of a weaker pound, increased feed cost for turkeys and depressed crop yields because of the hot summer. With careful shopping around it is possible to cut costs. The cheapest supermarket for all the required items, Lidl is 40% cheaper than the most expensive Waitrose. If you bought each item at the supermarket with the lowest price, how much would the meal cost for a family of eight?
a) £58.59
b) £19.84
c) £24.90
d) £79.99

4. Which of the following institutions is most trusted by Americans?
a) The armed forces
b) Congress
c) The President
d) Small business

5. Which of the following Christmas puddings came top in a Which? magazine blind taste test this year?
a) Co-op (75p per 100g)
b) Harrods (£2.86 per 100g)
c) Iceland (80p per 100g)
d) Waitrose (£1.76 per 100g)

6. In which country did the head of state sack two senior ministers and deployed the army to shore up cashew nut prices this year?
a) Bolivia
b) Mexico
c) Tanzania
d) Philippines

7. UBS regularly tracks prices and earnings in different parts of the world. Looking at the price of an iPhone X and average salaries, where would you need to work the fewest number of days to purchase the iPhone X?
a) Zurich
b) New York
c) Tel Aviv
d) Cairo

8. How likely is someone who has never used cocaine to test positive for traces of the drug on their fingertips?
a) One in ten chance
b) One in fifty chance
c) One in one hundred chance
d) One in five hundred chance

9. Consumer technology is distracting and addictive. Some economists have suggested that the slowdown in productivity growth seen in many western countries may partly reflect a collective loss of concentration caused by consumer technologies. Match the following four activities to the amount of time they consume, in the answer options below.
a) Daily social media usage by US millennials during the workday
b) Time needed to recover full attention for a demanding mental task following an interruption, such as reading emails or checking social media
c) Daily smart phone usage in the US
d) Average time spent each day by Britons watching TV

i) 3.8 hours
ii) 1.8 hours
iii) 25 minutes
iv) 2.5 hours

10. According to the United Nations World Happiness Report which of the following was the happiest country in 2018?
a) Finland
b) Chile
c) New Zealand
d) Germany

11. What percentage of recent graduates in the UK are working in non-graduate roles?
a) 12%
b) 23%
c) 36%
d) 49%

12. Which country held a referendum this year on subsidising farmers who let their cows’ horns grow naturally?
a) India
b) Canada
c) Switzerland
d) Lesotho

 

Answers to the Deloitte Christmas Quiz

 

1. Much of the modern Christmas was created in the nineteenth century. Match the person to the Christmas innovation.

Answer:
a) The invention of the Christmas cracker in 1848 – Tom Smith, a leading confectioner in Victorian England. Inspired by a trip to Paris where he saw sugared almonds wrapped in twists of paper, Smith came up with the idea of the Christmas cracker: a simple package filled with sweets that snapped when pulled apart. The sweets were replaced by small gifts and paper hats in the late Victorian period.
b) The first commercial Christmas cards in 1843 – Sir Henry Cole, prolific Victorian inventor. In 1843 Henry Cole commissioned an artist to design a card for Christmas. The illustration showed a group of people around a dinner table and a Christmas message. At one shilling each, these were pricey for ordinary Victorians and so were not immediately accessible. However the sentiment caught on and many children – Queen Victoria’s included – were encouraged to make their own Christmas cards.
c) The Christmas tree’s arrival in the UK – Queen Charlotte, the German wife of George III. Prince Albert, Queen Victoria’s consort, is usually credited with introducing the Christmas tree to England in 1840. However, another German member of the British Royal family, the equally popular ‘good Queen Charlotte’, set up the first known English tree at Queen’s Lodge, Windsor, 30 years earlier, in December 1800.
d) A Christmas Carol, written in 1843 – Charles Dickens. The classic Christmas story, with its tale of a lifetime of greed and Christmas redemption, features the elderly miser Ebenezer Scrooge. First published on 19 December 1843, the first edition sold out by Christmas Eve.

2. Three of the following were removed from the basket of goods used to calculate the UK Consumer Price Index (CPI) this year and one was added. Which were removed?
a) Prepared mashed potato
b) ATM charges
c) Action cameras
d) Bottles of lager at a nightclub
e) Women’s exercise leggings
f) Pork pies

Answer: ATM charges, bottled larger at nightclubs and pork pies have been removed from the basket of goods used to calculate UK inflation. Prepared mashed potato, action cameras and women’s exercise leggings have been added. ATM charges have been dropped due to the decline in the number of cash machine terminals, due in part to rising contactless payments. Pork pies have been excluded in favour of quiches. The exclusion of bottles of larger in nightclubs reflects the decline in the number of venues across the UK. The inclusion of women’s exercise leggings and action cameras such as GoPros highlights the growing trend of healthy living and exercise. Prepared mashed potato has been added back to the CPI index almost 30 years after ‘Smash’ (a powdered product to which water was added) was dropped from the index.

3. According to Good Housekeeping magazine the cost of a Christmas dinner, including turkey, vegetables, mince pies, Christmas pudding, cake and brandy butter, has risen by 25% in the last two years. Rising prices reflect the effects of a weaker pound, increased feed cost for turkeys and depressed crop yields because of the hot summer. With careful shopping around it is possible to cut costs. The cheapest supermarket for all the required items, Lidl is 40% cheaper than the most expensive Waitrose. If you bought each item at the supermarket with the lowest price, how much would the meal cost for a family of eight?
a) £58.59
b) £19.84
c) £24.90
d) £79.99

Answer: £24.90 or £3.11 per head for a family of eight. £19.84 was the cost two years ago, in 2016, of the basket. That was the lowest price in ten years. £79.99 is the price of 75cl bottle of Bollinger La Grande Année Brut Vintage Champagne. £58.59 is the price of Tesco Finest British Free-Range Heritage Narragansett Turkey.

4. Which of the following institutions is most trusted by Americans?
a) The armed forces
b) Congress
c) The President
d) Small business

Answer: The armed forces are the most trusted institution in America according to a 2018 survey by US research firm Gallup. 74% of respondents said they had ‘a great deal’ or ‘a lot’ of confidence in the armed forces. The armed forces in the US have consistently been the most trusted institution since the survey began in 1978 but support has edged lower from 82% in 2009.  Confidence in Congress is just 11%, the lowest reading for any of the 15 institutions on which respondents were quizzed. The proportion of responses expressing ‘great confidence’ in the Presidency has increased to 22%, the highest level since 2009, President Obama’s first year in office.  Small business and the police are the second and third most trusted institutions.

5. Which of the following Christmas puddings came top in a Which? magazine blind taste test this year?
a) Co-op (75p per 100g)
b) Harrods (£2.86 per 100g)
c) Iceland (80p per 100g)
d) Waitrose (£1.76 per 100g)

Answer: Iceland’s offering came first in the blind taste test of twelve Christmas puddings conducted by Which?. Four baking experts scored the Iceland pudding at 75%, due to its rich, boozy flavours and abundance of nuts. The Co-Op ‘irresistible’ pudding came in second and, at 75p per 100g, it was also the cheapest pudding tested. Harrods’s pudding was third despite it being the most expensive of the twelve. Waitrose was one of the lowest-ranked puddings with the experts remarking that it looked “unpleasantly oily”.

6. In which country did the head of state sack two senior ministers and deployed the army to shore up cashew nut prices this year?
a) Bolivia
b) Mexico
c) Tanzania
d) Philippines

Answer: Tanzania. Cashew nuts are Tanzania’s most valuable export crop and farmers had refused to sell their harvest to private traders saying that offered prices were too low. In 2013, a similar crisis had led to riots by cashew farmers. Tanzanian president John Magufuli responded to the latest crisis by sacking his agriculture and trade ministers and deploying the armed forces to purchase the crop at a higher price than offered by traders.

7. UBS regularly tracks prices and earnings in different parts of the world. Looking at the price of an iPhone X and average salaries, where would you need to work the fewest number of days to purchase the iPhone X?
a) Zurich
b) New York
c) Tel Aviv
d) Cairo

Answer: A typical worker in Zurich would need to work for 4.7 days to buy the new iPhone X due to relatively high wages and the strong Swiss franc. A worker in Cairo would need to work for 133.3 days to purchase the X. In New York it would require 6.7 working days and 12.7 in Tel Aviv. The length of time it takes to buy an iPhone in Cairo is reflective of a weak currency and low wages. The Egyptian pound has fallen by over 50% against the dollar since the beginning of 2016. It takes 11.3 working days to buy the iPhone X in London.

8. How likely is someone who has never used cocaine to test positive for traces of the drug on their fingertips?
a) One in ten chance
b) One in fifty chance
c) One in one hundred chance
d) One in five hundred chance

Answer: One in ten people who have never used cocaine have traces of it on their hands, according to research from the University of Surrey. More than 10% of 50 volunteers who’d never taken the drug had traces on their fingertips. A large number of people who are not drug users pick up traces of cocaine from handling bank notes.  An overwhelming majority of bank notes pick up traces of cocaine after a few weeks in circulation. In 2015, a bus driver won an unfair dismissal claim after being fired for failing a drugs test as a result of handling bank notes contaminated with cocaine.

9. Consumer technology is distracting and addictive. Some economists have suggested that the slowdown in productivity growth seen in many western countries may partly reflect a collection loss of concentration caused by consumer technologies. Match the activities to the amount of time they consume.

Answer:
a) Daily social media usage by US millennials during the workday – 1.8 hours (US Chamber of Commerce Foundation Millennial Generation Research Review)
b) Time needed to recover full attention for a demanding mental task following an interruption, such as reading emails or checking social media – 25 minutes (The Cost of Interrupted Work: More Speed and Stress, University of California at Irvine)
c) Daily smart phone usage in the US – 2.5 hours (dscout research)
d) Average time spent by Britons watching TV – 3.8 hours (survey for PerfectHome) Research carried out at the University of London confirms how interruptions weaken the quality of our thinking. Eighty volunteers were asked to carry out problem solving tasks, firstly in a quiet environment and then while being bombarded with new emails and phone calls. Although they were told not to respond to any messages, researchers found that their attention was significantly disturbed. The average IQ was reduced by ten points, double the amount seen in studies involving cannabis users. Men were twice as distracted as women. (An IQ between 90 and 110 is considered average. Over 120 is seen as being ‘superior’).

10. According to the United Nations World Happiness Report which of the following was the happiest country in 2018?
a) Finland
b) Chile
c) New Zealand
d) Germany

Answer: Finland is the happiest country in the world according to the United Nations World Happiness Report 2018. Nordic countries occupy four of the top five places, and are recognised in the report for being stable, safe and socially progressive with low levels of corruption. Norway is in second place, followed by Denmark, then Iceland and Switzerland in fifth spot. The report highlights the interesting disparity between wealth and happiness in some of the world’s richest nations, including the US. The US ranks 18th for happiness, one spot above the UK, despite them being two of the wealthiest countries in the world. Per capita wealth is just one of the six significant factors which the report says contribute to happiness: social support, life expectancy, freedom to make life choices, generosity and employment levels.

11. What percentage of recent graduates in the UK are working in non-graduate roles?
a) 12%
b) 23%
c) 36%
d) 49%

Answer: 49% of recent UK graduates were working in non-graduate roles last autumn, up from 39% in 2001, according to the latest publicly available data from the ONS. A study by the OECD found that although graduate unemployment rates in the UK are among the lowest in the world, too many graduates were in low-paid, non-graduate jobs because they lacked basic numeracy and literacy skills.

12. Which country held a referendum this year on subsidising farmers who let their cows’ horns grow naturally?
a) India
b) Canada
c) Switzerland
d) Lesotho

Answer: Switzerland. Swiss farmer Armin Capaul campaigned for years to discourage the practice of farmers dehorning their cows, which makes it easier and cheaper to rear them, culminating in a national referendum this year. Supporters argue that animals should be left the way nature intended, for their wellbeing and happiness. The Swiss rejected the proposal with 54% voting against

OUR REVIEW OF LAST WEEK’S NEWS
The FTSE 100 ended the week down 2.7%.

Economics and business

  • In what was seen as a backlash against migration several EU states and other western countries, including the US, have rejected a UN accord intended to make legal migration easier
  • The decision of the Belgian government to endorse the migration accord led to the rightwing N-VA party leaving the government in protest and prompted a political crisis
  • Qatar will leave oil producers’ alliance OPEC in 2019 after six decades of membership following a deterioration of relations with its Arab neighbours
  • OPEC defied US President Donald Trump’s calls to maintain output by agreeing to cut production, in response to the recent drop in prices
  • IMF Chief Economist Maurice Obstfeld said that he expects US growth to slow in 2019 and 2020 as the effect of tax cuts and spending hikes reduces
  • The CFO of Huawei, Meng Wanzhou, was arrested in Vancouver on a US warrant alleging Ms Meng was involved in breaking US sanctions against Iran; China reacted angrily to the arrest
  • The head of the UK intelligence agency, MI6, Alex Younger, warned that using infrastructure from the Chinese telecoms company Huawei posed a security threat to the UK
  • UK telco BT announced it will strip Huawei equipment from its core 4G network and will not use it in its upcoming 5G rollout due to security concerns
  • The UK services sector PMI fell sharply in November to the lowest level since the immediate aftermath of the Brexit vote
  • UK construction activity rose faster than expected in November with the construction industry recording the highest level of job creation since 2015
  • European aerospace company Airbus said that the UK’s decision to quit the military side of the EU’s Galileo satellite navigation project, after it was frozen out by Brussels, weakens European security ambitions
  • The stock of foreign direct investment into the UK rose by £149.2bn to £1.33tn in 2017, including a 321% increase in investment from India
  • Scotland’s finance secretary Derek Mackay said it has scope to impose higher income taxes on the wealthy than in other parts of the UK
  • The US economy added a lower-than-expected 155,000 jobs in November
  • Luxembourg is to become the first country in the world to make all its public transport free
  • Japanese drugmaker Takeda Pharmaceutical won shareholder approval for its £46bn takeover of Irish pharma company Shire
  • France and Germany abandoned European plans to impose a wide-ranging digital tax on tech companies in favour of a narrow levy on advertising sales
  • The FT reported that Swedish autonomous vehicle start-up Einride and German logistics group DB Schenker are expecting regulatory approval by January allowing an electric, driverless truck to operate on a public road in Sweden

Brexit and European politics

  • The French government suspended planned fuel tax rises after weeks of violent protests in the country
  • France’s finance minister Bruno Le Maire said the protests were “a crisis” for society and democracy saying, “It’s a catastrophe for commerce, it’s a catastrophe for our economy”.
  • Former Bank of England governor Mervyn King likened Theresa May’s Brexit deal to the appeasement of the Nazis in the 1930s
  • Conservative MP Dominic Grieve won support for an amendment in the Commons, which will give Parliament a direct say in what happens if the Brexit transition deal is voted down on Tuesday
  • The UK government was forced to release the legal advice it received on Brexit from the Attorney General after it was found in contempt of Parliament for withholding it
  • The FT reported that prominent Leave campaigners are making quiet preparations for a second referendum, working with an aide to Lynton Crosby, the strategist for Conservatives in the 2015 election
  • Vox, a far right party in Spain exceeded expectations by gaining 12 seats in the Andalucían regional election, the first such success since dictator Franco’s death in 1975
  • UK government officials warned that Dover and other Channel ports face disruption for up to six months if the UK leaves the EU without a deal

 

And finally…

  • UK’s National Health Service is to be banned from buying fax machines from next month, and has been told to phase them out soon, after it emerged that 9000 fax machines are in use by it in England – faxy that

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