Weekly Economic Briefing: Retail’s gap year

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’s gap year

Deloitte Access Economics’ latest quarterly Retail Forecasts suggests growth in retail turnover will slip further in 2019, to just 1.6%, after weakening to 2.2% in 2018. Housing wealth gains have dried up, and there are question marks over the share market as well. Labour income growth is good, but not yet good enough to avoid some damage to retail growth in the absence of households finding an excuse to save even less than they are. Yet when households’ wealth is heading downwards, they have a stronger incentive to be more prudent with their cash. That spells more tough conditions for retailers this year.

Australia’s economy began 2019 with some cracks beginning to appear. Construction activity has pulled back, driven by declines in the housing market. Exports continue to perform strongly, especially in the gas and coal sectors, but this has not translated into any major lift in investment activity.

Many retailers have only survived the last few years because Australians have actually lived beyond their means. Households’ disposable income has only grown by an average of 1.9% per annum over the last five years, but growth in consumer spending has averaged a considerably higher 2.5% growth. That is clearly not sustainable.

The approaching Federal election, and next month’s Budget, may provide a windfall to retailers as both sides of politics bid for votes. Personal income taxes are being proposed by the incumbent government, and there is speculation about more cash handouts, reminiscent of 2008-09 – and either, or both, would provide a boost for retail spending.

So while 2019 looks like it will be another tough year for retailers, we expect 2020 to be a better year for sales. As the chart below show, we expect retail growth to lift back up next year, with asset (house) price trauma likely to have largely worked through by then, leaving labour income growth as the key underlying driver once again. There is upside pressure on wages, particularly in pockets of hot demand such as infrastructure and digital, and this is expected to continue building through 2019, providing a strong platform for retail spending as we head into 2020.

Chart:  Nominal and real Australian retail turnover


Source: ABS Cat 8501.0, Deloitte Access Economics

That leaves 2019 as retail’s ‘gap year’ – nursing a hangover, but also moving ahead in a year’s time.

Retailers in 2019 will be focused on making it through the year, but they should also take the opportunity to ready themselves for the upturn and future success. By becoming more competitive, streamlining operations, and strengthening customer connections, they’ll be best positioned for the revival.

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. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’.

  • This morning we are launching our quarterly “Global Economy in Charts” report, a 20-page slide deck, available at the ‘Deloitte Monday Briefing’ page. Created by my colleague Debo, the report examines the big global macro trends and challenges. Charts can be cut and pasted into your own reports. Do drop Debo a line at dde@deloitte.co.uk with ideas and comments.
  • With hindsight the early 2000s marked the peak of a long boom in international trade and capital flows. Since 2008 that process of globalisation has been rocked by the financial crisis, sub-par growth and protectionism.
  • It’s been quite a setback for what, in social and economic terms, has been one of the dominant ideas of the last 50 years. But history suggests that, far from being unprecedented, neither the up nor the down is new.
  • Globalisation is a new word and did not appear in the corpus of English language books until the 1980s. But the practice of international trade and commerce is as old as human society. The ancient empires, and those of Europe in the last 600 years, were, in varying degrees, trading enterprises.
  • The modern era of globalisation can be traced to the early nineteenth century and the ideas of the English economist, David Ricardo. He built a powerful case for free trade, based on the then radical idea that trade was mutually beneficial. Industrialisation, colonisation and technology drove trade through the nineteenth century.
  • This was also a period of large population movements from Europe to the ‘New World’. Between 1879 and 1913 Europe lost 13% of its working age population to migration, with countries on Europe’s periphery losing far more (Italy’s working population declined by 39%, Ireland’s by 45%). Over the same period the working age population of the US, Canada, Australia and Argentina rose by 49%.
  • By the early twentieth century, with trade, overseas investment and population flows booming, a European war seemed inconceivable to many. In 1909 Norman Angell, a British politician, journalist and Nobel Prize winner, published The Great Illusion. It argued that trade had created huge prosperity and that war was improbable and, were it to occur, it would be short-lived. The book was hugely influential. Angell was correct in his analysis of the gains from trade, but sadly, quite wrong in his conclusions about war.
  • What followed for the next 35 years, to the late 1940s, was an unwinding of globalisation. Two world wars, political and economic chaos and the great depression stoked nationalism and protectionism. Central banks, which before the war, had cooperated to stabilise the international monetary system and boost trade, instead focused on national objectives. Global trade and capital movements slumped.
  • With the end of the Second World War the world returned to the path of globalisation. The post war institutions created by the US and its allies, particularly the World Trade Organisation, fostered co-operation and presided over a progressive dismantling of tariffs. At the high point of protectionism, in 1931, tariffs on manufactured imports to the US hit an average of 48%. By the early 2000s, successive waves of liberalisation had reduced the average US tariff to just 3%.
  • New technologies, from shipping containers to the jet aircraft, collapsed the cost of transport for goods and people. Advances in Information Technology facilitated the growth of connected international financial markets.
  • From Deng Xiaoping’s landmark economic reforms of 1978, to the Thatcher-Reagan free market movement of the 1980s, the collapse of Soviet Communism and China’s accession to the World Trade Organisation in 2001 the tide of ideas ran ever more strongly in favour of globalisation.
  • The financial crisis of 2008-09 brought that era to an end, stoking a set of long running concerns around de-industrialisation, inequality and social exclusion. Globalisation has since come under fire from the left and the right. In the 2016 US primaries the leading candidate of the left, Bernie Sanders, decried the free trade deals of recent years, including NAFTA, as “a disaster for the American worker”. Meanwhile, from the nationalist right, Marine le Pen, head of France’s Front Nationale, has described globalisation as “a barbarity”.
  • Growth in international trade, a key measure of globalisation, has slowed markedly in the last ten years. The pace of trade liberalisation has cooled and, with the imposition of tariffs by the US last year, in some areas has gone into reverse. America, previously a champion of free trade and international co-operation, is now a critic.
  • The period between the two world wars demonstrates how far, and how fast, globalisation can unwind. It is a measure of how severe the setback was that trade’s share of world GDP did not return to 1913 levels until the 1970s.
  • But the forces which reversed globalisation between 1913-1945 were on a wholly different scale to those confronting it today. Two world wars, the rise of totalitarianism and a depression which, in human terms, was immeasurably worse than the 2008-09 financial crisis, inflicted huge damage on the international order.
  • Globalisation today is not in retreat. Growth in trade has slowed, not reversed. There’s been no reversal of cross border capital movements, of overseas ownership of assets or foreign direct investment.
  • It is not hard to imagine how things could get worse, perhaps through a tit-for-tat escalation of tariffs or the weakening of international institutions such as the World Trade Organisation. But a far more likely outcome is a continuation of the slow globalisation of recent years, not its wholesale reversal.
  • Agreed, trade has its detractors, but mainstream politicians in most rich nations remain strong advocates. In the last 40 years trade and industrialisation have propelled hundreds of millions out of poverty in emerging markets. China’s trade surplus, its dependence on exports, and it scale, make it an advocate of trade. In the West the standard of living is more-than-ever dependent on abundant imports of goods and services that could not remotely be produced at such prices at home.
  • Norman Angell was wrong to believe, exactly one hundred years ago, that globalisation was too useful to be reversed. This time, for all the challenges it faces, globalisation looks more useful than ever.

PS: Last week my colleague Tom Simmons attended a Chatham House event where MPs, including Labour’s Stephen Kinnock and the Conservative’s Nick Boles, presented an alternative Brexit plan, variously known as ‘Common Market 2.0’ or ‘Norway Plus’. The plan would see the UK exiting the EU but retaining a close economic relationship with it through membership of the European Free Trade Association (EFTA) and the European Economic Area (EEA). The UK would remain in the single market but would be outside the jurisdiction of the EU’s political institutions, including the European Court of Justice and the Common Fisheries Policies. The UK would also stay in a temporary customs union (the ‘plus’ part of ‘Norway plus’) with the EU while other arrangements are being negotiated to preserve a soft border in Ireland. One significant caveat is that the UK would have to accept the free movement of people from the EU, something which Mrs May regards as unacceptable. However, the MPs who back Norway Plus say that the UK would have the power to suspend free movement if it is having “serious economic, societal or environmental difficulties”. Its sponsors believe that should Mrs May’s deal be rejected by the House of Commons, Norway Plus is the most sensible, and politically viable, alternative.


The UK FTSE 100 equity index ended the week down 0.3% at 7,207

Economics and business

  • Global equities have had their best start to the year in two decades, up 12% in the year to date
  • The US trade representative, Robert Lighthizer, and the US Treasury Secretary, Steven Mnuchin, are to visit China this week for further talks, with limited signs of progress since our last briefing
  • US President Donald Trump has again pressured allies not to use Huawei equipment in the new 5G networks
  • UK inflation rose marginally to 1.9% in the year to February, up from 1.8% in January
  • UK unemployment fell to its lowest level since 1975, at 3.9%, as pay growth continued to outstrip inflation, rising by 3.4% in the three months to the end of January
  • The Bank of England announced it is keeping interest rates on hold at 0.75% with future policy likely to be determined by the outcome of Brexit
  • UK retail sales were unexpectedly strong, despite low levels of consumer confidence
  • The US Federal Reserve signalled a further dovish shift last week, keeping rates on hold and slowing the reduction of its balance sheet. Investors are now not expecting any further rates rises this year
  • Fees charged by asset managers reached new lows due to increased competition from low-cost passive funds
  • The energy trader Vitol is forecasting peak oil demand within 15 years
  • The Department for Transport is to examine whether to allow electric scooters and skateboards on the roads as part of an urban mobility review
  • The UK Office for National Statistics is to launch a new set of ‘real-time’ economic indicators, using data on VAT, ship movements and road traffic
  • WorldPay, formerly owned by RBS, is to be acquired for $43bn by a US group
  • Levi Strauss was floated on the New York Stock Exchange this week, with prices quickly rising 30% above the initial valuation of $17
  • In a sign of a tighter UK labour market, the hotel chain Travelodge has announced that it is targeting parents by offering roles with greater flexibility

Brexit and European politics

  • The EU has agreed to a two-week Brexit delay to 12 April with an extension to 22 May if the withdrawal agreement is approved by the UK parliament
  • A longer delay is thought to require participation in European elections. If the UK is to participate it must decide by 12 April
  • This longer delay would also require agreement from all other EU leaders, which is thought to be unlikely unless there is a significant shift in negotiating strategy
  • A group of cross-party MPs plan to lay an amendment for indicative votes which would allow parliament to take control of the process by voting on a range of options
  • Failure to pass her deal and a longer delay is likely to place Theresa May’s premiership under intense pressure. Potential successors appear to be positioning themselves for a leadership contest
  • The French government has seen a quieter weekend of protests following the sacking of the head of the Paris police and troops being sent onto the streets
  • Toyota has announced that it is to produce a new Suzuki model at a plant in Derbyshire
  • New investment by sovereign wealth funds in the UK fell by 91% in 2018
  • The clothing retailer Next has announced that it could lower prices in a no-deal Brexit scenario to reflect the savings from reduced trade tariffs
  • According to a Bank of England survey, 80% of firms are ‘as ready as they can be’ for a no-deal Brexit

And finally… A man in Texas tested the ‘all leashed pets welcome’ policy at his local pet shop by walking his 1600lb African Watusi, a longhorn cow with horns measuring nine and a half foot from tip to tip, into the store – bull market






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