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A weird thing about economics is that good news sometimes shows up looking like bad news. Here’s a very current example: retail sales in Australia are terrible right now. But that could be a blessing.
Why does good news wear a bad disguise? Often because of the reaction. When something bad happens, the government intervenes to make the economy stronger. And vice versa: if the economy looks too strong, the government will do something to cool it.
For example, when consumers are running hot, the RBA raises rates to prevent spending getting too high and pushing up prices. But when consumers are terrified, sheltering at home and spending only the bare minimum on toast and beans, the RBA is more prone to cut rates.
We are in the latter scenario now. Retail trade growth just came in at 0.8% over the year. Which is terrible. Absolutely abysmal. It’s the fifth-lowest datapoint in the chart below. The only worse figures were back in 2000 when the GST was intriduced, and during Covid lockdowns.
The recent result is not an aberration either. The last several months have seen consistently weak year-on-year growth. This is not a data error, it is real. And retailers are noticing, big time.
Coles put out its results this week and announced people are buying a lot more home-brand items, while cutting back on alcohol purchases. Australian spending is being trimmed to the bone.
Bear in mind, too, that supermarkets are the strongest area of spending. We are buying much less café and restaurant food but we still need to eat so supermarkets are actually one of the bright points.
Frugal trends are being seen in a lot of markets where interest rates have been hiked recently. McDonald’s reported its financial results to market last week—even the mighty golden arches admitted sales were wobbly as consumers tried to save money. Their stock price is down from the highs seen earlier this year when the fight against inflation seemed to be going much better.
The Bright Spot
When you consider that Australia’s population is booming in 2023-24, the 0.8% growth in retail sales looks even worse. Our population has grown far more than 0.8% over the last year, so people are spending a lot less, per capita. If there weren’t so many new arrivals, there’d be businesses collapsing everywhere. The point of the economy is to raise individual living standards and that is not happening right now.
So far, so grim. Here’s the good news. The atrocious state of Australian retail is a sign that consumer spending is suppressed and the high level of interest rates is doing its job.
Combine that with rising unemployment, and you have a signal that could stop the RBA from considering rate hikes and ensure they deliver, instead, rate relief by the end of the year. Unemployment is up to 3.8% (in seasonally adjusted terms, higher in trend terms) and the signals from the online job markets are that it will go higher still. Insolvencies are soaring.
After months of predicting a rate cut, futures markets recently swung to predicting a hike. But the new data caused a big swing in the chance of a rate hike this year. Before the retail figures came out, the futures markets judged a rate hike by September as more likely than not, and if not September then probably November (note: prices for certain futures contracts can be used to judge the chance of an official interest rate hike). But now the futures market has cooled its jets. A rate hike this year is now seen as a mere possibility, less than one chance in three, and rate cuts early next year are more likely.
Good News for Mortgage Holders
This should come as a big relief to mortgage holders, who have been depressed recently. As the next chart shows, they are the gloomiest cohort in Australia —even gloomier than the renters whose landlords are delivering giant hikes in their weekly rent.
The mortgage holders are likely to be the ones who have reined in their shopping and dining out recently. That restraint should pay off for them if the RBA cuts rates and their weekly mortgage repayment finally come down again.
There are young families out there whose kids barely know the taste of fresh fruit and veg, whose parents can’t turn down overtime, who stay home every weekend, who make do on ABC iView not Disney+, whose cars are falling apart and probably their marriages too. Their period of stress is, hopefully, coming to an end.
