Sample Only. Retail Forecasts. Price growth returns to retail. November 2014

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1 Retail Forecasts Price growth returns to retail November 2014

2 Retail Forecasts November 2014 Retail Forecasts is produced quarterly and provides an analysis of current retail sales and consumer spending, and the important economic drivers which influence them. It includes ten year forecasts of retail sales by major category and of key economic drivers. The accompanying Detailed Consumer Spending provides ten year forecasts of detailed Household Final Consumption Expenditure categories and detailed retail sales categories. Comments and feedback We are happy to respond to any inquiries in relation to our forecasts. Any comments and feedback you provide will assist us to improve the publication. To discuss, please contact: Neal Sarma Tel: +61 (0) daesubscriptions@deloitte.com.au.

3 Budget Monitor Budget Monitor is a leading source of accurate and independent private sector projections of Federal budget trends in Australia. Budgets are analysed and projections made, including detailed estimates of future spending and revenue levels. Budget Monitor is prepared twice a year, prior to the Mid-Year Review and Federal Budget itself. Subscription options Annual standard hard copy subscription: $1,056 per year or $528 for a single issue Annual standard electronic subscription: $1,243 per year or $638 for a single issue. Business Outlook Business Outlook, released quarterly, is specifically designed for business analysts and strategic managers. Subscribers to the standard hard copy or electronic subscription are also eligible to purchase the Business Outlook on CD. The CD subscription contains forecasts out ten years, in quarterly, calendar and financial year formats, as well as detailed history and charts, all in Excel. Subscription options NB: Annual standard hard copy subscription: $1,859 per year or $836 for a single issue Annual standard electronic subscription: $2,783 per year or $1,232 for a single issue Annual CD subscription: $1,012 per year or $539 for a single issue. The CD version can only be purchased in addition to an annual or single standard hard copy or electronic subscription. Employment Forecasts Employment Forecasts, released quarterly, provides forecasts and commentary for each industry, plus white collar, blue collar and office demand index (where the latter draws on the 'office intensity' of each industry). There are three levels of data available: State, City and CBD. Employment Forecasts is particularly useful in the analysis of property market demand. Subscription options Annual subscription Level 3 (CBD, City and State):$10,582 per year or $6,699 for a single issue Annual subscription Level 2 (City and State): $9,526 per year or $5,643 for a single issue Annual subscription Level 1 (State only): $8,459 per year or $4,939 for a single issue.

4 Investment Monitor The quarterly Investment Monitor lists around 900 Australian investment projects, each valued from $20 million. Projects are divided by State, sector and status (ie, possible, under consideration, committed, under construction). The publication also contains commentary on industry trends, and company contact details for those companies involved in the projects. Subscription options Annual standard subscription: $1,210 per year or $616 for a single issue Monthly updates: $264 per year Historic database: $1,210 one off purchase. N.B: The monthly updates and historic database can only be purchased in addition to an annual standard hard copy or electronic subscription. Retail Forecasts Retail Forecasts, produced quarterly, provides detailed analysis of current retail sales and consumer spending. Included are National retail forecasts, retail sector forecasts, State retail forecasts, disposable income, non-income influences on retail spending and broader macroeconomic influences. An annual subscription includes four quarterly reports plus Excel spreadsheets including 10 year forecasts and charts. Subscription options Annual standard hard copy or electronic subscription: $2,651 or $737 for a single issue Annual standard hard copy or electronic subscription including detailed consumer spending forecasts: $8,822 or $2,651 for a single issue For publication and subscription information, please contact: Kellie Chalker-Hall Manager Subscriptions and Marketing Tel: +61 (0) daesubscriptions@deloitte.com.au 3

5 Disclaimer Deloitte Access Economics provides assessments of current macro conditions in Australia and internationally, forecasts for the Australian economy and analysis of current policies, and the longer-term economic planning framework. We undertake client work in specialised fields such as taxation, superannuation, tourism, communications, transport, energy, macroeconomic policy, immigration, health, education, econometric modelling and the policy environment for specific industries. This includes the finance sector, particularly superannuation, banking and insurance. While every effort has been made to ensure the accuracy of this document, the uncertain nature of economic data, forecasting and analysis means that Deloitte Access Economics is unable to make any warranties in relation to the information contained herein. Deloitte Access Economics, its employees and agents disclaim liability for any loss or damage, which may arise as a consequence of any person relying on the information contained in this document. We remind clients that the Outlook s easy-to-read style often simplifies and adds emphasis to make its point. The views in this publication are those of the authors and do not represent the views of Deloitte Touche Tohmatsu or any of its affiliates (Deloitte). This publication is provided as general information only and does not consider anyone s specific objectives, situation or needs. You should not rely on the information in this publication. Neither the authors nor Deloitte accept any duty of care or liability to anyone regarding this publication or any loss suffered in connection with the use of this publication or any of its content. Authorised Use 2014, Deloitte Access Economics Pty Ltd This publication contains confidential and propriety information of Deloitte Access Economics. All of the material in this publication is for your exclusive use and may not be otherwise used or modified for or by any other person or sold to or otherwise provided in whole or in part to any other person or entity without the prior written consent of Deloitte Access Economics. For subscribers use only. NOT TO BE PHOTOCOPIED. A standard hard copy or electronic subscription to this publication entitles employees of the same organisation and same physical location as the subscriber to the use of its contents for internal reporting purposes only. Multiple user licenses are available for organisations with more than one location.

6 Contents Summary 4 National retail forecasts 6 Retail sector forecasts 8 State retail forecasts 12 Feature article Deloitte Christmas Survey 15 Household disposable income 17 Household wealth 21 Sentiment and debt influences 24 Income and spending summary 26 Broader macro influences 27 Charts Chart 1 : Nominal and real Australian retail turnover 4 Chart 2 Nominal retail turnover growth, last 12 months 6 Chart 3 : Real retail turnover, quarterly % change 6 Chart 4 : Real retail turnover as share of household disposable income 7 Chart 5 : Retail sector profits, ratio to sales 8 Chart 6 : Retail sector investment, value of building approved 9 Chart 7 : Non-food performs 10 Chart 8 : Except Dept stores 10 Chart 9 : Café boom 10 Chart 10 : Growth in real retail turnover by State 12 Chart 11 : NSW and VIC forecasts 14 Chart 12 : QLD and WA forecasts 14 Chart 13 : SA and TAS forecasts 14 Chart 14 : NT and ACT forecasts 14 Chart 15 : Christmas period sales 15 Chart 16 : Christmas period margins 15 Chart 17 : Greatest risk to business 16 Chart 18 : 12 month economic outlook 16 Chart 19 : Job numbers and hours worked, trend 17 Chart 20 : GDP growth and employment growth 18 Chart 21 : Real wages and real disposable income 19 Chart 22 : 90 day bank bill rates 20 Chart 23 : Household interest paid 20 Chart 24 : Household savings ratio 21 Chart 25 : Australian share market index value and PE (price to earnings) ratio 22 Chart 26 : Real house prices 23 Chart 27 : Nominal house prices 23 Chart 28 : Consumer confidence index 24 Deloitte Access Economics Retail Forecasts 2

7 Chart 29 : Consumer unemployment expectations index 24 Chart 30 : Housing finance approvals 25 Chart 31 : Growth in consumer debt aggregates 25 Chart 32 : Real household disposable income and consumer spending 26 Chart 33 : Major trading partner GDP and inflation growth 27 Chart 34 : $US and Trade Weighted Index per $A exchange rates 29 Tables Table 1 : Retail sales forecasts by category: volume, price and value 11 Table 2 : Real retail turnover forecasts by State 14 Table 3 : Income and spending forecasts 26 Deloitte Access Economics Retail Forecasts 3

8 Summary Price growth returns to retail Retailers can enter the Christmas sales period of 2014 pretty pleased with how the year has gone. Despite an economy which on many fronts has been lacklustre (with the national unemployment rate drifting up), retail spending has continued through the year achieving solid gains. Latest data shows nominal retail sales growth of 6. over the year to the September quarter, and retailers can also expect a solid sales performance in the December quarter (thanks particularly to low interest rates and a handy dividend to retailers from the rapid pace of house price gains). Overall, calendar 2014 is expected to deliver nominal retail sales growth of 5.4% over the year. That is reminiscent of the sort of sales growth which was seen regularly pre-gfc, but has been absent since. Indeed, the average gain over the previous four calendar years has been just 3. per annum. The other key difference for retailers about 2014 (compared to what has generally been seen in the post-gfc environment) is that there has also been some price growth amongst those gains. Retail price growth over calendar 2014 is expected to come in at 2.1%, compared with an average gain of 0.8% per annum over the past four years. Some of that additional price growth is due to an Australian dollar which has lost ground over recent months. But the broader environment has also been more supportive for retailers allowing prices to be pushed up when the $A falls something which is not necessarily always the case. That suggests the retail sector has seen a degree of margin expansion, or at least margin retention, at play. The Deloitte Retail Christmas Survey supports this view, with retailers stating they are more confident about their ability to increase margins this Christmas. The healthy retail environment may extend into 2015 but then gradually fade. Too much support at the moment is coming via low interest rates, and that support will dissipate over time, although labour income growth should improve over time and provide some offset. 12% 1 8% 6% 4% 2% Year-to % change Chart 1: Nominal and real Australian retail turnover Nominal retail turnover - Aust Real retail turnover - Aust -2% Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Source: ABS , Deloitte Access Economics Forecast Deloitte Access Economics Retail Forecasts 4

9 Macro environment The global economy continues to deliver its fair share of concerns. Economic growth in the Eurozone is once again faltering, this time led by weakness in France and Germany, while Japan has just entered its third recession since the GFC. But central banks in both these economies are on the case, providing significant stimulus, while the US economy is improving and so far successfully handling the transition away from quantitative easing. Overall, the IMF still expects global economic growth is expected to be stronger in 2015 than it was in 2014, with the US driving much of this gain. The bigger story for Australia will be closer to home with a slowdown in China s industrial demand sending coal and iron ore prices tumbling and, in turn, denting national income growth. But the longer term economic potential is still there, with much of Australia s focus around the G20 dominated by China and India the framework for a free trade agreement with China, and enhancing Australia s strategic relationship with India. This is not misguided, with China Australia s most important trading partner and India set to be the world s most populous nation, and a key driver of global economic growth in the coming decades. That leaves Australia well placed for economic growth over time, but still facing a difficult transition in 2015 as new resources investment slides and income growth is affected by a commodity price rout. Hence, interest rates remain low in Australia, and there continues to be downward pressure on the $A. Retail sales to date Retail sales went backwards in May with a loss of confidence around the Federal budget, but the sector has achieved strong sales gains over the four months since then for which data has been released. Household goods retailing has led those recent gains, buoyed by additional housing construction and turnover, while both food retailers and cafes and restaurants are showing strong sales growth over the past year. The outlook for retail sales Weak national income growth and strong retail sales growth aren t a combination you might usually expect, but that has been a feature of Low interest rates have provided some considerable relief to the household budget. They have also encouraged consumers to save less of their income and increase the rate of consumer borrowing once more. But this stimulus may soon run out of steam with asset prices getting stretched, and with consumer confidence still shaky (limiting the degree to which consumers may be comfortable in running down savings). Employment growth is expected to improve over the next two years and provide some offset for retailers, but perhaps not enough to maintain retail growth at current rates given that the global economy is still struggling to find momentum. Overall, real (inflation-adjusted) retail sales growth is expected to show growth of 3.2% in calendar 2014, up from 2.5% in As the low interest rate impetus fades, we may then move to 2.5% growth in 2015 and 1.6% growth in Retail price growth has also picked up through 2014, and is expected to moderate in 2015 (barring a further significant shift down in the $A). State by State New South Wales continues to dominate the retail growth race based on latest data over the year to September 2014 putting daylight between itself and all other jurisdictions. This does highlight the role of low interest rates and rising house prices (with the latter very much led by Sydney in this cycle) in stimulating retail spending. Those drivers won t last and New South Wales will likely come back to the pack in Despite current woes with weak commodity prices and falling resources investment, Western Australia and Queensland are still expected to deliver the strongest retail growth over the next five years, with stronger trade linkages to the world s key growth economies - China and India. Deloitte Access Economics Retail Forecasts 5

10 National retail forecasts The broader market has been supportive for retailers through 2014 much more so than over recent years. It s still a tough retail environment, but when the overall retail market is growing in the vicinity of 5-6% over the year, there is room for individual retailers to expand. Hence we do see some optimism coming through in retailers expectations for Christmas. Most retailers are expecting they will see sales growth this Christmas, and around half are expecting they will be able to increase their margins this year. Unfortunately it doesn t necessarily get any easier going forward. With rapid house price growth likely to be curtailed soon, and with little sign of momentum in jobs growth, the end of 2014 may be very close to the peak in this retail cycle. Latest data shows nominal retail sales growth of 6. over the year to the September quarter, a benchmark which hasn t been reached since 2009 (amid the cash handouts in the immediate aftermath of the GFC). That makes 2014 a good year for retail, although those gains haven t always been seen evenly throughout the year. There was significant consumer nervousness following the release of the Federal budget, and recovery since then. Indeed, Chart 2 shows that it has been a good past few months for retail four consecutive months of gains with a particularly strong result in September. Chart 2 Nominal retail turnover growth, last 12 months Chart 3: Real retail turnover, quarterly % change Chart 3 shows that the December quarter of 2014 is also expected to see solid sales growth for retailers. The Deloitte Christmas Survey of retailers (discussed in more detail as a special feature), suggests that 75% of retailers do expect to see sales growth this Christmas, although that group also believes it will be growth of 5% or less. There is also some optimism for 2015 with 7 of respondents to the survey planning to increase store numbers in For retailers the 2014 expansion has been seen across both sales volumes and across pricing. Deloitte Access Economics Retail Forecasts 6

11 Sales volumes or real (inflation adjusted) retail turnover has been lifting as a share of income across the past two years (Chart 4), reversing a longer run downward trend. In part the economic cycle is at play here. Low interest rates have encouraged the purchase of consumer durables which are often credit financed, and which had lost some ground to spending on services and experiences in recent years. The lift in housing activity seen through 2014 has also encouraged the purchase of such goods. But these cyclical supports will turn as interest rates lift and housing activity moderates once more, and hence retail s share of broader income may flatten out in 2015 rather than keep rising as it has done of late. 31% 3 29% 28% 27% 26% 25% 24% Chart 4: Real retail turnover as share of household disposable income Real retail turnover % of household disposable income 23% Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Source: ABS , Forecast Retail price growth has also lifted through 2014, which may in part be due to an Australian dollar losing ground. That said, respondents to the Deloitte Christmas survey of retailers did not expect the recent decline in the Aussie dollar to affect prices this Christmas period as most prices were locked in months ago. It is also the case that price strength has been seen in food retailing and cafes and restaurants, with these sectors less exposed to the $A and more exposed to local wages growth (which has been very low), suggesting retailers have been able to expand their margins to some degree. Retail price growth is expected to moderate going into 2015, though there will no doubt be some price growth linked to the recent moderation in the $A, plus the potential that the $A may fall further in the short term (iron ore prices continue to plummet and the RBA is continuing to rate the $A as over-valued). Interest rate rises at some point through 2015 may also help to keep retail price growth in check (event though the primary target of any rate rise will be house prices). And as house price growth does start to dissipate, that will hamper the wealth effect on retail spending which has been the dominant one of late, leaving consumers less willing to continue to run down their savings rate. All up, that suggests that we may have a lower growth environment for retail 12 months from now. Overall, real (inflation-adjusted) retail sales growth is expected to show growth of 3.2% in calendar 2014, up from 2.5% in As the low interest rate impetus fades, we may then move to 2.5% growth in 2015 and 1.6% growth in Retail price growth is also expected to moderate in 2015 (barring a further significant shift down in the $A). Deloitte Access Economics Retail Forecasts 7

12 Retail sector forecasts The past year has seen strong sales results for eating out and specialist non-food retailers. Among the key drivers, low interest rates and a recovery in housing construction has been lifting household goods retailing which is now seeing the strongest sales performance since the GFC. Clothing retailers also experienced a strong rebound in September following a mid-year slump influenced by warm weather. On the other hand, food retailers are dealing with high price inflation, while department stores continue to lose market share. Although retail sales volumes showed a decent performance in the September quarter, ABS data suggest that profit margins remained at around the same level as last quarter. That is somewhat disappointing given that the June quarter was affected by heavy discounting by clothing retailers and department stores on the back of unusually warm weather. Chart 5 shows gross profit margins for retailers have remained reasonably steady of late. Looking ahead, the Deloitte Retail Christmas Survey suggests some better news may be ahead, with retailers stating they are more confident about their ability to increase margins this Christmas. 6% 5% 4% 3% 2% 1% Chart 5: Retail sector profits, ratio to sales Ratio of gross operating profits to sales, retail sector Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Source: ABS Chart 6 shows that the value of building approved in the retail sector picked up in the September quarter after a weak outcome in the June quarter. When averaged across the past year, the level of retail investment has fallen by around 15% compared to its peak in March 2014 but is still up around 65% from its post-gfc lows in late Part of the expansion is due to high profile international fashion retailers now focussing on further expansion in regional shopping centres, which is helping to drive demand for regional shopping centre space. That is helping to support expansion plans for a number of regional shopping centres including Macquarie Centre in Sydney, Westfield North Lakes in Brisbane, Pacific Fair on the Gold Coast and Chadstone in Melbourne. Colliers also report that retail vacancy rates for large format retail dropped significantly in the first half of 2014, driven by the demand for large format space from hardware retail developments with the expansion of Masters and Bunnings helping to drive this demand. Deloitte Access Economics Retail Forecasts 8

13 Chart 6: Retail sector investment, value of building approved 2,500 Value of building approved, $m 2,000 1,500 1, Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Source: ABS Online sales The NAB Online Retail Sales Index for September 2014 indicates that the pace of year-on-year growth in online retail sales has picked up further in recent months to 12.8%. Growth was seen across most categories over the past year, with the strongest growth rates recorded for homewares and appliances as well as electronic games and toys. The NAB estimate suggests that online retail sales now account for 6.7% of total retail sales. Food retail sales volumes rose by a modest 0.2% in the September quarter after recording a fall in the June quarter. Price inflation for food retailers has continued to be strong of late, with prices rising by a further 1% in the September quarter and by 4.5% over the past year the highest rate of food price inflation for five years. CPI data indicates strong rises in fresh produce prices, including meat prices and especially fruit and vegetable prices. That has likely contributed to the softer growth in sales volumes over the past year. Food sales may remain relatively subdued in the near term, before gradually picking up over time. Clothing footwear and personal accessory retailing experienced a strong performance in the September quarter, with sales volumes rising by 2.. That was the first rise in sales volumes since late last year, with the growth in sales volumes over the past year reasonably solid at around 4%. Discounting was seen again in the September quarter with the sector remaining very competitive, with overall prices recording a fall in the quarter which would have provided some additional support for sales volumes. These forecasts see a further moderation in the annual rate of sales volumes growth for clothing retailers in the near term. Deloitte Access Economics Retail Forecasts 9

14 Chart 7: Non-food performs Chart 8: Except Dept stores Chart 9: Café boom 6% 5% 4% Year-to % change, real retail turnover Forecast 1 8% 6% Year-to % change, real retail turnover Forecast 3% 4% 2% 1% -1% Food Non Food -2% Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Source: ABS , Deloitte Access Economics 2% -2% Dept stores Hhd goods -4% Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Source: ABS , Deloitte Access Economics Department stores are continuing to struggle. Sales volumes were almost flat in the September quarter, rising by only 0.1% after falls in the previous two quarters. As a result, sales volumes at department stores have shown no growth since the December quarter of last year. The poor recent sales for department stores can be contrasted with the strong sales volumes in the September quarter for both clothing and household goods retailers. As seen for clothing retailers, overall prices fell at department stores in the September quarter. A relatively modest growth outlook is forecast for department stores. Household goods sales volumes rose by 1.7% in the September quarter pushing the growth in sales volumes to 5.5% over the past year. That is the strongest year-on-year growth rate in household goods sales volumes since the GFC, with household goods retailing now the strongest traditional retail segment outside of eating out. Low interest rates are clearly helping to boost sales for this segment, with cheap credit and the strong lift in housing construction supporting consumer durables spending. Prices for household goods rose again in the September quarter, and recent falls in the $A will continue to be a source of upward pressure on costs and prices. While strength in household goods retailing should remain in the near term, some moderation in sales growth can be expected through 2015 as the recent spurt in housing construction begins to wind down and later as interest rates eventually start to rise. Other retailing includes retailers who deliver staples, such as newsagents and chemists, as well as discretionary sales retailers, such as toys and sporting goods and also includes a catch all sub-category covering pure play online retailers. Sales volumes for this category rose by 0.9% in the September quarter. Latest data indicate that sales growth has been seen in all sub-categories of other retailing over the past year. However, sales have been somewhat subdued in recent months for recreational goods retailing, while newspaper and book retailing has recently shown signs of stabilising after a long period of decline. A solid rate of sales growth is expected for this segment in the near term as low interest rates continue to support discretionary spending. Cafes, restaurants and takeaway food sales rose by 1.5% in the September quarter, with sales growth over the past year now at 8.3% which is the highest of all retail sectors. Prices rose in the quarter for this segment and have risen by 2.5% over the past year. While price inflation has been above that for other retail categories, it is currently below typical rates of price inflation for this category given the higher exposure to labour costs. Within the category, cafes and restaurants have shown stronger sales growth than takeaway food services over the past year, although both have shown growth. Some moderation is expected for this category following the recent elevated gains but consumer preferences for convenience and eating out as leisure activity should underpin solid longer term prospects. Deloitte Access Economics Retail Forecasts 10

15 Table 1: Retail sales forecasts by category: volume, price and value History Forecasts 5 yr avg 5 yr avg % change to to Volumes Food 2.7% 2.5% 1.3% 1.9% 1.7% 2.8% 3.3% 2.1% 2.2% Department stores % 0.6% -0.1% 0.7% 1.6% 0.6% -0.1% 0.7% Clothing and footwear 3.3% 6.5% 3.1% 1.8% 2.1% 2.9% 2.4% 2.7% 2.5% Household goods 2.6% 3.5% 5.4% % 4.6% 2.4% 2.5% 3.6% Other retailing 0.6% 1.9% 3.6% % 4.8% 3.9% 2.9% 3.9% Non food 1.9% 2.8% 3.7% % 2.2% 3.1% Cafes and restaurants 1.8% 5.7% 5.2% 1.9% 1.7% 2.5% % 2.9% Total 2.2% 3.1% 2.9% 1.9% 2.3% 3.3% % 2.7% Prices Food 1.7% 2.2% % 2.6% 2.1% % 2.7% Department stores -0.7% -0.1% -0.8% 0.6% 0.3% % -0.5% 0. Clothing and footwear 0.1% -0.2% -1.5% % 0.8% 0.7% -0.5% 0.6% Household goods -1.3% 0.4% 0.9% -0.5% -0.7% -0.8% % -0.4% Other retailing 0.6% 1.3% 0.5% -0.1% -0.5% -0.7% -0.7% 0.9% -0.3% Non food -0.4% 0.5% 0.1% 0.2% -0.1% -0.4% -0.5% -0.2% -0.1% Cafes and restaurants % 2.8% 2.5% 2.5% 2.3% 2.2% 3.1% 2.5% Total 0.9% 1.5% % 1.3% % Values Food 4.5% 4.8% 5.3% 4.7% 4.4% % 4.1% 4.9% Department stores 0.3% % 0.5% % 0.6% -0.6% 0.7% Clothing and footwear 3.4% 6.4% 1.5% 3.8% 3.5% 3.7% 3.1% 2.2% 3.1% Household goods 1.3% % 1.5% 2.7% 3.8% 1.4% 1.6% 3.1% Other retailing 1.2% 3.1% 4.1% 2.9% 3.4% 4.1% 3.2% 3.8% 3.6% Non food 1.4% 3.4% 3.8% 2.2% 2.9% 3.6% 2.1% % Cafes and restaurants 4.9% 8.3% 8.2% 4.5% 4.2% 4.8% 5.3% 6.7% 5.4% Total 3.1% 4.6% % 3.7% 4.3% % 4.1% Source: ABS , Deloitte Access Economics Deloitte Access Economics Retail Forecasts 11

16 State retail forecasts New South Wales continues to dominate the retail growth race based on latest data over the year to September 2014 putting daylight between itself and all other jurisdictions. This does highlight the role of low interest rates and rising house prices (with the latter very much led by Sydney in this cycle) in stimulating retail spending. Those drivers won t last and New South Wales will likely come back to the pack in Despite current woes with weak commodity prices and falling resources investment, Western Australia and Queensland are still expected to deliver the strongest retail growth over the next five years, with stronger trade linkages to the world s key growth economies - China and India. Chart 10 shows New South Wales clear at the top of the State leaderboard for retail sales growth over the past year. Sales volumes rose by a strong 1.5% in the September quarter to push growth over the year to 6.9%. New South Wales is an interest rate sensitive economy, and the economy has clearly responded to low interest rates. House price rises have been by far the strongest in Sydney, while housing construction is lifting and the State s labour market has also been performing relatively well. Population growth has also lifted and is almost at the same pace as the national average for the first time in a number of years. Even so, continuing house price rises at the current breakneck pace aren t sustainable forever and a notable moderation in the pace of retail spending growth is likely over the course of 2015, particularly as Sydney s house price cycle runs out of puff. 8% 6% 4% 2% -2% Chart 10: Growth in real retail turnover by State Year-to Sep-2014 % change, real retail turnover ACT Source: ABS NT WA SA QLD Sales volumes rose by 1.6% in Victoria in the September quarter, just ahead of New South Wales, with Victoria now the second best performing State over the past year. Among the important drivers of retail turnover, population growth has lifted to above the national average in Victoria and remains a key source of relative strength for the State. Along with low interest rates, that has helped the housing market in Melbourne to be the second best performing behind Sydney. Recent falls in the $A are also a welcome development for the State s relatively large manufacturing base. However, Victoria is yet to see the full fallout from the closure of automotive manufacturing in 2016 (including through a significant auto supply chain), and the labour market remains patchy. As in New South Wales, retail sales growth may moderate through the course of AUST TAS VIC NSW Deloitte Access Economics Retail Forecasts 12

17 Queensland s retail sector recorded a fall of 0.6% in sales volumes in the September quarter, the second consecutive quarterly fall in sales volumes. Queensland s economic drivers are in transition, reflecting sharp falls in commodity prices which are hitting the coal sector and a looming construction cliff as major LNG projects wind up over the next couple of years. That said, resource exports will rise as projects reach completion while falls in the $A are good news for the State s exporters including the tourism sector. Even so, with coal prices under pressure there is a risk that additional coal mines may close while the State s population growth has slowed and is now lagging the national average. While the near term does present challenges, we expect the State s population growth to turn around in time and our outlook is for Queensland s economy and retail sector to outperform over the longer term. Retail sales volumes rose by 1.1% in the September quarter in South Australia, but sales have been flat over the past year. The State s job market has been underperforming, partly a reflection of the State s relatively large exposure to manufacturing. While Adelaide s housing prices have lifted, the rise has been notably less than in Sydney and Melbourne. Although the lower $A will help the outlook, population growth remains well below the national average and the State s retail sector is expected to continue to underperform over time. Western Australia recorded a rise in retail sales volumes of 0.9% in the September quarter, with the level of sales volumes still slightly lower than a year ago. The State s economy is clearly feeling the impacts of the downturn underway in mining construction with the recent slump in the iron ore price only adding to the pain. An indication of the fallout can be seen in the decelerating rate of population growth which has eased significantly over the past twelve months, although it still remains well above average. As in Queensland, the near term presents clear challenges for Western Australia, but Western Australia s retail sector is expected to recover, with good population gains helping to underpin retail activity over time. Retail sales volumes in Tasmania were almost flat in the September quarter, recording a rise of only 0.1%. However, growth in sales volumes over the past year remains above the national average, supported by strong sales growth earlier in the year. The State s economy and retail sector have been gradually improving following several years of poor performance, with low interest rates providing support. While population growth has lifted slightly in recent months, it remains the weakest of all States and the outlook for Tasmania s retail sector remains correspondingly modest. Northern Territory retail sales volumes fell by 1.2% in the September quarter, with the Territory s retail sector now performing below the national average over the past year. While the Ichthys LNG project is still under construction until 2016, some of the initial boost to economic growth provided by the project has faded as the peak in the construction work through the current cycle has now passed. Job growth has dropped back to near the national average in recent months while population growth is now below the national average. While its impact on growth is now fading, the Ichthys LNG project will continue to provide some underlying support for the Territory s retail sector in the near term but further ahead the NT economy will need a new growth driver. The ACT has the weakest performing retail sector over the past year (see Chart 10), although sales volumes recorded a rise of 2.4% in the September quarter. Public sector cutbacks are finally hitting home for the ACT, a jurisdiction in which the Federal public service is the dominant employer. A range of economic indicators now show developing weakness, including in local employment, as well as in Canberra s housing market, which has seen the weakest price growth of all capitals over the past year. Those circumstances are contributing to slowing population growth in the ACT, which has now fallen below the national average. With a further deterioration in the Federal Budget outlook since May s Budget, continuing pressure on the staffing cost base can be expected. The outlook for the ACT s retail sector therefore remains weak. Deloitte Access Economics Retail Forecasts 13

18 Chart 11: NSW and VIC forecasts Chart 12: QLD and WA forecasts 8% 6% 4% 2% -2% -4% Sep-10 Sep-11 Year-to % change, real retail turnover Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Forecast Sep-17 Chart 13: SA and TAS forecasts Sep-18 Source: ABS , Deloitte Access Economics 1 8% 6% 4% 2% -2% -4% -6% Sep-10 Year-to % change, real retail turnover Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Forecast Sep-17 Source: ABS , Deloitte Access Economics SA TAS NSW VIC Sep-18 Source: ABS , Deloitte Access Economics Sep-19 Sep-19 12% 1-2% Chart 14: NT and ACT forecasts Table 2: Real retail turnover forecasts by State 8% 6% 4% 2% Sep-10 Year-to % change, real retail turnover Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Forecast Sep-17 QLD WA Sep-18 Source: ABS , Deloitte Access Economics 8% 6% 4% 2% -2% -4% Sep-10 Year-to % change, real retail turnover Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Forecast Sep-16 Sep-17 ACT NT Source: ABS , Deloitte Access Economics History Forecasts 5 yr avg 5 yr avg Real % change to to Australia 2.2% 3.1% 2.9% 1.9% 2.3% 3.3% % 2.7% NSW 2.6% 4.8% 4.6% 1.1% 1.1% 2.4% % 2.2% VIC -0.2% 3.2% 3.4% % 3.1% 3.2% 2.1% 2.6% QLD 3.9% 2.9% 1.5% 3.5% 3.1% 4.2% 3.9% 2.2% 3.2% SA -1.1% 1.2% 2.2% 1.9% 2.2% 2.7% 1.8% % WA 6.1% % 3.8% 4.2% % 3.9% 3.6% TAS % 1.3% 0.9% 1.3% 2.2% 1.3% % NT % 1.9% 2.1% % 3.5% 2.3% 2.4% ACT 3.8% 0.1% 0.5% % 2.3% 1.7% 1.9% Sep-18 Sep-19 Sep-19 Deloitte Access Economics Retail Forecasts 14

19 Feature article Deloitte Christmas Survey The third instalment of the Deloitte Christmas Retailers Survey was conducted in September and October Deloitte surveyed a cross section of 63 executives and senior management from Australia s retail sector and covered areas including the Christmas outlook, strategic focus, key business risks, the online landscape and the outlook for the next 12 months. The full report can be found here. The outlook for Christmas Cautious optimism is the defining feature of retailers outlook for the 2014 Christmas period. 75% of survey respondents expect sales to increase this Christmas, albeit modestly (Chart 15). While this outcome is a modest improvement on last year, the size of the expected growth is lower with no respondents expecting growth of 5% or more. Retailers also expect to see a rise in margins this Christmas with 49% of retailers expecting positive margins growth (Chart 16). This is an improvement on the results from the last two years and suggests that retail shareholders should have some good news this Christmas. The falling Australian dollar is not expected to have a major impact on prices by retailers this Christmas. 76% of survey respondents expect there to be no effect as retailers have already locked in their inventory prices. This should be welcome news for constrained consumers and will help support retail sales volumes over Christmas. 4 35% 3 25% 2 15% 1 5% Online trends Chart 15: Christmas period sales Do you expect Christmas sales to exceed the previous Christmas trading period? Source: Deloitte Chart 16: Christmas period margins Online sales continue to grow in importance for Australian retailers with 83% of survey respondents indicating that online sales for this Christmas period will exceed that of last year. Online sales growth is again expected to outpace overall sales growth, reflecting the maturing level of online retailing. This is shown in the decline in the number of survey respondents who expect to have no online sales this Christmas, down to 19% from 25% last year. Positioning for growth Do you expect margins for the Christmas period to exceed the previous year? 45% % 2012 After a challenging 2013, the strategic focus for retailers has somewhat shifted. 37% of respondents said that organic growth was the number one strategic priority for their business, 3 25% 2 15% 1 5% Source: Deloitte Deloitte Access Economics Retail Forecasts 15

20 up from 27% in Meanwhile the number of respondents citing efficiency and cost control as the key strategic priority for their business was down 15%, perhaps reflecting the improved margins seen by retailers of late. The growth result was strongest amongst clothing, footwear and accessories outlets, with 54% of respondents in this sector said that organic growth was the number one strategic priority, while only 14% cited efficiency and cost control. Key risks Macroeconomic factors continue to be seen as a concern by retailers. 39% of survey respondents cited macroeconomic factors as the greatest risk to their business (Chart 17). This is slightly down from last year but well above the second highest key risk (existing competitors at 27%). Consumer confidence has been generally soft since the Commonwealth Budget in May and has only marginally recovered. Weak employment and wages growth, combined with uncertainty around future Budget policy mean that households remain cautious. This is clearly weighing on the outlook for retailers. Outlook for the next 12 months Retailers expectations for business conditions over the next 12 months remain muted. 68% of survey respondents expect consumer confidence to stay at its current low levels while 17% expect it to deteriorate further. There are similar expectations for the performance of the broader economy with 51% of respondents expecting it to stay the same while 29% expect it to get worse (Chart 18). This is a worse outcome than 2013 where 39% of respondents expected an improvement in the economy. However, some of this unease about the future economic outlook can be attributed to the improvement in conditions this year. Even with the unease around broader economic performance, a majority of retailers still expect to see earnings growth over the next 12 months, with 42% of respondents expecting earnings growth of 5% or more. While there are some risks to retailers, including weak consumer confidence and worsening economic conditions, retailers are generally upbeat about their expectations for the coming Christmas trading period and 2015 more broadly. Chart 17: Greatest risk to business What do you consider to be the greatest risk in your business? 45% 4 35% 3 25% 2 15% 1 5% Chart 18: 12 month economic outlook How will the broader economy perform in the next 12 months? Source: Deloitte Improve Source: Deloitte Deterioriate Stay the same Deloitte Access Economics Retail Forecasts 16

21 Household disposable income Overview Disposable income is driven by jobs growth, wage gains ahead of inflation, changes in interest payments, and taxation and social security arrangements. Each of these is discussed here in turn. The following sections then analyse household wealth (which affects decisions around the willingness to spend), sentiment and debt influences (which have some bearing on the affordability of durables and the timing of purchases), and broader influences (the world economy and exchange rates). Employment Since the last Retail Forecasts was released, the Bureau of Statistics has made some changes to the way it reports the unemployment rate. The sharp movements in the unemployment rate seen around July have been revised away. That said, latest data for October 2014 still shows the national unemployment rate at 6.2%, its highest level in over a decade. For retailers, the current lack of employment growth is concerning. However, there is also every chance that this may be the high point for the unemployment rate in this cycle. The housing construction sector, fueled by rising house prices and low interest rates, continues to contribute strongly to employment growth, while the falling $A may assist many trade exposed sectors to expand. This economic transition towards more labour intensive sectors should allow for stronger rates of employment growth over the next two years. Over the year to October 2014, the annual rate of employment growth sits at 0.9%. This is an improvement on what was seen in early 2014, but still not quite strong enough to stop the unemployment rate from drifting up. While the rate of jobs growth has moved up a little over the year, growth in the number of hours worked has trended down. 5% 3% 1% -1% Year to growth (%) Chart 19: Job numbers and hours worked, trend Hours worked Job numbers -3% Oct-96 Oct-98 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12 Oct-14 Source: ABS Both demand and supply side factors continue to contribute to weakness in jobs growth. The ageing of the population is reducing the supply of workers, with those in older age cohorts less likely to participate in the labour force. The demand side of the equation is also weak, with not Deloitte Access Economics Retail Forecasts 17

22 enough jobs being created yet in expanding sectors to offset job losses in parts of manufacturing, mining and mining services and soak up new entrants to the labour force. At the State level, employment growth outcomes have also been mixed so far in Since the start of the year through to October, New South Wales has been the strongest State economy, adding 43,000 jobs, and is in line with the buoyant State retail sales and Sydney house price growth seen this year. More surprising is that Western Australia has also added a solid number of additional jobs, some 40,000 in 2014, despite significant pull-backs in mining related construction. Solid gains have also been registered in Victoria (32,000) and Tasmania (10,000) over the year. But the labour market performances of South Australia (just 4,000 new jobs) and Queensland (zero) have been very disappointing. While the overall picture is modest, there are some areas of strength in the labour market. Historically low interest rates and increasing house prices are providing a big boost to the housing construction industry, particularly in Melbourne and Sydney (and residential construction is labour intensive). This increase in housing activity will continue into 2015 as dwelling approval numbers remain robust. Other sectors including education, health care and property services have also recorded significant recent jobs growth. With the Reserve Bank expected to keep the cash rate low for the foreseeable future, favourable monetary policy should continue to support employment across credit sensitive sectors. The further move down in the $A over recent months will similarly provide greater ability for those in trade exposed sectors to expand. Leading indicators for jobs growth have also improved in the last few months. The ANZ job advertisement series has been strong of late, suggesting that jobs growth should improve in the coming months. Overall, the outlook for employment growth is for some improvement as the economy continues to switch away from resource project construction as a key driver towards other activities, but it may not be as much employment growth as retailers would hope to see. Calendar 2014 is expected to see overall employment growth of 1.1%, with this expected to shift up to 1.6% in each of calendar 2015 and % 4% 2% Year-to % change Chart 20: GDP growth and employment growth Employment growth GDP growth Forecast -2% Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18 Source: ABS , , Deloitte Access Economics Deloitte Access Economics Retail Forecasts 18

23 Wages and prices The story for real wage growth in Australia remains consistent with an economy in transition and struggling to achieve trend growth. Continued weakness in the labour market has contributed to weak nominal wage growth which remains at historic lows. While inflation moderated in the September quarter, it is likely to pick up in the short term as the Australian dollar continues to fall. That will likely mean an extended period of low or negative real wage growth going forward. CPI growth moderated in the September quarter, down to 2.3% on a through the year basis, but comfortably within the RBA s target band of 2 to 3%. Against generally modest price pressures, the biggest price increases for the quarter were in alcohol and tobacco, education and health. Looking forward there are some countervailing pressures. The fall in the Australian dollar will result in some inflation pressure from imports, while the continued weak rate of growth in wages should keep price pressures restrained, resulting in a moderate outlook for inflation. 1 8% 6% 4% 2% -2% Year-to % change Chart 21: Real wages and real disposable income -4% Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18 Source: ABS , , Deloitte Access Economics Real wages Real disposable income Forecast The wage price index grew by 2.5% for the year to September 2014 and remains at historically low levels. Employees are not in a strong position to bid up wages at the moment with the rate of jobs growth so weak. Although prospects are stronger for jobs growth in 2015, it still may be some time before we see a notable reduction in unemployment, and hence the pressure for wage increases is likely to remain well contained. Wage growth differentials across the States also compressed in the September quarter. Over the past year Western Australia has gone from the strongest performing state in terms of wage growth to the weakest bar the ACT, with the level of mining investment now rapidly unwinding. No jurisdiction is seeing a particularly rapid rate of wage growth at present, with annual wage growth sitting below 3% across all States and Territories. Real (inflation adjusted) wage growth remains subdued with a decline of 0.1% for the year ended September 2014, and real wage growth may remain quite subdued over the next two years (Chart 21) before a lift post Deloitte Access Economics Retail Forecasts 19