Why did retail sales fall flat?

Ross Greenwood speaks to Paul Dales, Chief Australia & New Zealand Economist at Capital Economics, about the latest retail figures, and why cutting prices has failed to produce higher sales volumes.

Introduction: Retails sales flat

Ross Greenwood: I want to take you to something that’s actually caused the Australian dollar to fall today. There’s a few reasons why it should be falling I should tell you. Such as interest rates in the UK, rising interest rates in the United States rising according to the Federal Reserve from the December this year. One other thing and that is retail sales. Now economists broadly forecast that September retail sales would be up by 0.4% they were dead flat. The previous month they’d been down by point five of a percent. In other words retail sales if anything are going backwards. Now this is against the backdrop of rising employment, generally when people got more employment you tend to think that they’re going to spend some more.

It’s also a situation where people are now at least a little concerned about their debts especially in Sydney, maybe even to a certain extent in Brisbane. Lesser extent in Melbourne about falling property prices. In other words big debt, falling property prices. Let’s try and find out the way in which economists are reading this one. Paul Dales is the Chief Economist for Australia and New Zealand of Capital Economics, he’s on the line. Many thanks for your time Paul.

Interview with: Paul Dales, Chief Australia and New Zealand Economist, Capital Economics

Paul Dales: Oh it’s my pleasure Ross.

Ross Greenwood:  What’s happening in that retail landscape? Why are people do you think actually suddenly turning themselves inwards?

Paul Dales:  I think it’s a confluence of factors related to things like low rate growth. Rising utility bills, I mean you have less money to spend on other items. High household debts and more recently the weakening in the housing market. I think if you add all those things up together then it’s quite clearly there’s quite a number of downward that influences on households’ income. People are just deciding not to spend as much as before.

Ross Greenwood:  The interesting thing is just having a look at it, household goods, clothing and footwear. In other words it’s the things that people are spending on themselves and their houses that they’re actually cutting back on right now it seems. That would actually also then fade out in those retail sales numbers?

Paul Dales:  Yes that’s right. I think one of the really interesting trends here is how the weakening housing market is influencing other parts of the economy. We know the number of homes being sold has been declining quite rapidly over the past year or so. That simply means if there’s fewer homes being sold then there’s fewer new fridges, sofas, cushions and curtains that need to be bought. That’s why household goods are particularly weak at the moment and it’s because households simply aren’t spending on them.

Ross Greenwood:  I do know however the pickup short term in cafes and restaurants this almost seems to be part of a lifestyle. Particularly city dwellers these days they’re eating out more than their parents, their grandparents did and it’s part and parcel of the way in which they live.

Paul Dales:  Yes there’s a long term structural shift in towards spending in that category that will continue probably over the next five or 10 years or something like that. More recently the small rise we saw in December was pretty catchy compared to given that we had seen two reasonably big falls in the previous two months. Even the trends in that sector for me are a little bit weak at the moment.

Ross Greenwood:  Let’s now read this into the overall economy. What sort of an impact does retail sales and values have on the overall level of economic growth in Australia?

Paul Dales:  Well the good news is that households seem to be spending a little bit more in other areas outside of the retail sector. That may mean that consumption growth slows in the third quarter but doesn’t slow terribly sharply. Our estimates at Capital Economics are the GDP growth of 0.8% in the second quarter maybe followed by a more muted rise around 0.5% in the third.

Ross Greenwood:  Misplacing interest rates clearly because you saw the Australian dollar drop today and if the Australian dollar is dropping then the market is pretty much punting that the interest rate rises. It might have been forecast the next year or perhaps further end of the future?

Paul Dales:  That’s right. At Capital Economics we’ve been saying for sometime now that we don’t think interest rates in Australia will rise at all next year and probably won’t increase for a good chunk of 2019 as well. These data support that and even the financial market certainly moves towards that forecast in the last few weeks.

Ross Greenwood:  Just a quick one more I’ve got you because you would have been speaking to your colleagues around the world during the day and last night. The appointment of Jerome Powell, J. Powell is the new Chairman of the US Federal Reserve. It seemed almost in many people’s eyes to be a safe pair of hands, people work and certainly it might have been a radical chair of the US Federal Reserve come in and really try and push US economic policy around. In this case, he is perceived by markets and you can see this by the muted response today to be that safe pair of hands that the markets probably wanted?

Paul Dales:  That is right. He was the compromise option really where he’s in favor of low interest rates and in favour of a bit of deregulation of the financial sector which Janet Yellen wasn’t. We’re not convinced he’s a fantastic candidate really, he’s shown no real track record of independent thinking while he’s been on the Board of the Fed. We think it’s a bit of a shame when the Fed is going to face many challenges over the next five years or so. That we haven’t got a proven academic economist who can really grapple with those issues. It remains to be seen how he performs, I don’t think he’ll alter the paths of interest rates in the United States in the next year or so. We would have a bit more confidence if it’s someone with a bit more of a rigorous track record.

Ross Greenwood:  In the big challenge you talk about there he’s had a raise interest rates back to what they call a normalized level. At the same time start to unwind the quantitative easing. In other words the debt of the Federal Reserve is taken on its balance sheet which I think in last year was about 16 trillion dollars. To unwind all of that or at least most of it without actually plunging the United States economy back into recession. Which would have big impacts around the world.

Paul Dales:  Yes those things are the big issues that need to be dealt with but there’s also an even bigger theoretical issue where Central Bankers around the world are grappling with what generates inflation these days. We thought we all knew what it was and that was a faster economy and lower unemployment rates. We haven’t really seen much evidence of that so I think that’s one of the big issues that the Fed is going to have to deal with over the next few years. It remains to be seen quite what they come up with.

Ross Greenwood:  Paul Dales is the Chief Economist of Australia and New Zealand at Capital Economics, a global company and always great to have him on the program. Paul many thanks for your time.

Paul Dales:  Thanks very much.


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