Weekly economic briefing: Retail Forecasts – Shopping through gritted teeth

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.

Retail Forecasts – Shopping through gritted teeth

Recent months have seen consumer sentiment drift downward, but over the same time period retail spending growth has picked up, according to Deloitte Access Economics’ latest Retail Forecasts report.

Retail spending growth improved significantly over the June quarter. Strengthening employment outcomes including a rebound in full time jobs growth, as well as continued wealth gains from housing are providing the basis for spending to lift.

Nominal retail turnover growth was 3.6% for the year to June 2017, including 1.4% growth over the June quarter alone. The expectation is for retail sales to continue lifting over time, though monthly sales data for July did show a flat outcome.

Consumers may be spending, but they aren’t happy. Despite improvements in unemployment expectations and an increase in business confidence, consumer sentiment is at a low point. Record-low wage growth (1.9% over the year) and record high underemployment (9.3% of workers are underemployed), as well as housing market risks, could be blamed for the low consumer sentiment. A lack of income growth means that an improved rate of consumer spending has in part been financed by a reduction in savings (the household savings ratio fell over the June quarter to 4.6%).

Rising costs and falling prices mean that retailers are also not that happy.

Retail price growth is minimal. Wage growth in Australia remains negligible, currently at a record low of 1.9% over the year to June. Average prices across the economy are also growing slowly, at just 1.9% over the year. However retail prices are growing even slower, at just 1.0% over the year. Intense competition is keeping all retailers focused on delivering customer value at the lowest cost possible.

Every non-food retail category is expected to observe falling prices over the next five years. The broader entry of Amazon and other international online retailers into the Australian market over the coming years is expected to put further downward pressure on price growth. The chart below shows the expected rate of price growth by retail category over the next five years.

Chart: Retail price growth by category, five years to 2021-22

 

Energy prices put pressure on retail margins. The average price of electricity in Australia grew by 116.4% over the ten years to June 2017, and 7.8% over the last year alone. Key drivers of recent price growth include contractions in supply (i.e. closures of several power stations) and higher costs for new electricity generation. This adds further pressure to retailer margins, as intense competition keeps prices down.

On the bright side for retail costs, retail wage growth is growing slower than wage growth across the broader economy – which is already at record lows. However, wage growth won’t stay low forever and there are a number of other retail costs that are on the rise, including cybersecurity, investments in new technologies and energy costs.

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

 

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/

Don’t overdo the productivity pessimism

  • Economists disagree on lots of things, but on one thing at least there is a consensus. Productivity, or the efficiency of production, is the main driver of human welfare. The data bear this out. Consider that growth in living standards in the UK since the late nineteenth century has been driven entirely by rising productivity. It is not surprising that improving productivity is the Holy Grail of economic policy.
  • This is why the stagnation in productivity growth since the financial crisis represents such a challenge. Stagnating productivity means stagnating living standards and public services. To some such outcomes calls into question the legitimacy of the economic system.
  • There are four broad explanations for what has gone wrong.
  • The first relates to the lingering effects of the global financial crisis. Weak wage growth is likely to have reduced the incentives for firms to undertake productivity-raising investment. Faced with an uncertain world workers are sticking with their jobs for longer, slowing the diffusion of knowledge and skills across the economy. A continuation of very low interest rates has sustained some less productive businesses which, faced with higher rates, would have gone to the wall. In these, and numerous other ways, the financial crisis seems to have cast a long shadow over productivity growth.
  • The second theory relates to the behaviour of firms. Research by Professor John Van Reenan, of MIT, has found a stark divergence between the UK’s most productive firms and a long tail of low performers. Around 1% of UK firms saw average productivity growth of 6% per year between 2002 and 2014 but a third saw no increase at all. Other research has shown higher levels of productivity among exporting businesses than their domestically-focussed peers and among foreign owned businesses in the UK relative to their UK counterparts. The fact that businesses operating in the same environment and sector perform so differently suggests that management practices play a major role.
  • The third explanation is that the business environment is to blame. On this account a range of factors, from inadequate transport infrastructure to weaknesses in vocational training and restricted access to risk capital for small firms, are holding back UK productivity.
  • The fourth and gloomiest theory is that we have entered a new era of permanently low productivity growth. Some argue that we have banked the big inventions – everything from antibiotics, the internal combustion engine and electricity – and we are in an era of less revolutionary technological advance which condemns us to slower productivity growth. Others believe that ageing populations means a less flexible, creative and risk-loving workforce and, as a result, slower productivity growth. Age certainly affects some functions. The US General Aptitude Test shows that motor co-ordination, spatial and finger dexterity skills decline from the early 30s. Yet it is also the case that knowledge and experience increase with age.
  • I would love to be able to say that one of these four theories holds the key to low productivity. Frustratingly, it seems more likely that they have all played a part.
  • Economists have endlessly debated the productivity slowdown. Yet, to paraphrase Marx, the point is to change it. Here we see cause for optimism. Many of the factors cited as being responsible for the UK’s poor productivity performance are, at the least, changeable. Some are reversible. With time and the right policies the effects of the financial crisis should fade. New management, financial and business techniques can be diffused through the economy. The business environment can change for the better – as the Thatcher reforms of the 1980s and 1990s demonstrated.
  • But what notion of secular stagnation, that we are in an era of irreversibly low productivity growth?
  • Here I think we should be wary of the very human mistake of extrapolating the recent past – in this case of poor productivity growth – into the indefinite future. In reality productivity comes in waves.
  • The original idea of secular stagnation came from the US economist, Alvin Hansen, who, in the wake of the Great Depression of the 1930s argued that technology and population-driven growth was played out and the US was entering a new era of low growth. Three decades of unprecedented growth prosperity followed.
  • The same tendency was apparent in attitudes to the dotcom boom of the late 1990s. It stoked belief in a so-called ‘new paradigm’ of rapid, innovation-driven growth. Just as we were gearing up for a new era of endless prosperity the stock market crashed and the US economy dropped into recession.
  • With productivity, as with equity investment, the recent past is not necessarily a good guide to the future.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 0.8% at 7,378.

The US dollar fell to a 33-month low against a basket of major currencies amid concerns over North Korea, Hurricane Irma and Fed policy. In contrast, the euro strengthened to a near 3-year high, reflecting optimism over faster growth in the euro area.

 

International economic briefing by Ian Stewart

Economics and business

  • The European Central Bank (ECB) raised its euro area growth forecast to 2.2% for 2017, which would be the fastest in 10 years
  • President Putin warned that pursuing further sanctions against North Korea would be “useless”, and that diplomacy was the only answer
  • Donald Trump moved to scrap a policy that allows immigrants who arrived in the US illegally as children to remain and work in the country
  • Federal Reserve Governor Lael Brainard claimed caution is warranted on further monetary tightening while inflation remains subdued
  • Deutsche Bank chief executive John Cryan called on the ECB to end its ultra-loose monetary policy
  • Separately Mr Cryan warned of the onset of automation, saying: “In our banks we have people behaving like robots doing mechanical things, tomorrow we’re going to have robots behaving like people.”
  • The Archbishop of Canterbury, Justin Welby, said that the UK economic model is “broken” and needs fundamental reform to improve severe inequalities
  • Australian GDP rose by a quarterly rate of 0.8% in Q2, setting a new world record for the longest period without a recession (104 quarters)
  • Business confidence in South Africa hit a 32-year low in August following continued political turmoil and policy uncertainty
  • UK house prices rose in August at their fastest monthly pace this year, up 1.1% from July
  • The UK’s National Institute of Economic and Social Research forecast that UK GDP growth would edge up in the third quarter and that activity was rebalancing from household spending toward trade
  • Saudi Arabia is softening its radical economic reform plan, stripping out some aspects and pushing back timelines on others
  • London Mayor Sadiq Khan blocked a consortium of Middle Eastern property investors from cutting the affordable housing quota in a London development
  • In response to concerns about Russian foreign policy Sweden is starting its largest military exercises in 23 years and has re-introduced conscription

Brexit and European politics

  • A leaked Home Office paper suggests that the UK is developing a strict post-Brexit immigration policy to limit unskilled immigration
  • The report stipulates that immigration should not only benefit the migrants but also “make existing residents better off”
  • David Davis warned that negotiations over the Brexit “divorce bill” may be protracted
  • The European Court of Justice dismissed Hungary and Slovakia’s complaint over refugee quotas
  • German Chancellor Merkel and her rival in the upcoming election promised to end talks for Turkey’s accession to the EU amid rising tensions
  • The UK set out a list of EU research and innovation projects that it wishes to be part of following Brexit
  • Michel Barnier, the EU’s chief Brexit negotiator voiced concerns over the UK’s proposed border arrangement with Ireland

And finally…

  • The owners of a Russian home returned from working in a nearby town to find that their house had been part-bulldozed and a public highway had been laid in the middle of it – Road rage

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