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RBA's Luci Ellis Fires Off Retail Warning

For the past week the Reserve Bank has mounted a concerted attack on current economic beliefs in the government, opposition and markets that apart from weak wages growth, things are OK, jobs are booming and rate rises are on the way up.

Part of this thinking is that interest rates will soon rise as those offshore rise, led by the US Federal Reserve.

After last Tuesday’s post meeting statement from Governor Phil Lowe and then his speech in Sydney on Thursday night, followed by the first Statement on Monetary Policy from the bank for 2018 this belief that interest rates will rise sooner than later has been hammered down.

That’s not to say the next move in rates won’t be up, Governor Lowe admitted that on Thursday night, but from what else he said in that speech, the Monetary Policy Statement and a speech made Tuesday morning by the bank’s head of economics, Assistant Governor, Luci Ellis, a rate change is a long way off - perhaps “a few years”!

But for Australian investors, especially in retailing stocks, Ms Ellis also warned of the dangers from consumers starting to accept that low income (wages) growth will be the norm and not a one-off and adjusting their spending accordingly.

Add to this increased retail competition and we have a very different picture for the sector and investors in one of the largest and most important groups on the ASX with giants like Woolworths, Wesfarmers (Coles, Bunnings, Kmart, Officeworks and Target), and others like JB Hi-Fi. Harvey Norman, Premier Investments, Specialty Fashion, The Reject Shop, Lovisa, Myer (and unlisted groups like David Jones, Best and Less, Fantastic Furniture) and mall operators like Vicinity, Stockland, Scentre and SCA.

Ms Ellis’ warnings are a must read for investors (http://www.rba.gov.au/speeches/2018/sp-ag-2018-02-13.html).

"Australia has seen a marked increase in the number of major retail players. Foreign retailers have entered the local market in recent years and continue to do so.

“This has also induced the existing players to reduce their costs to stay competitive, for example by improving inventory management.

"This has probably been a bit easier for larger or less-diversified retailers than for smaller firms. Perhaps this is one of the reasons why growth in retail sales has been much weaker for smaller firms than larger firms.

"Whether through lower costs, narrower margins or a combination of both, this competitive dynamic has weighed on prices for consumer durables. And for staples such as food, competition and related changes in pricing strategy (such as Everyday Low Price strategies) have contributed to keeping prices barely changed in net terms for at least seven years,” Ms Ellis said.

If Ms Ellis is right it will be a major reason for investors to be wary of retailing where there have been two reports that have worried the market in the past few days.

Perhaps JB Hi-Fi's narrowing of profit margins in the December half was more to do with hesitant consumers rather than Amazon’s opening - the retailing cutting prices to try and spur spending from people passing through its stores.

And last Friday Myer’s admission that its post Christmas and New Year sales had bombed should be seen as confirmation of consumers pulling back or cutting spending and not as Solomon Lew and his supporters claim, weak retailing by Myer and its managers.

In fact Ms Ellis’ speech went further than Dr Lowe and the Monetary Policy Statement is skewering the belief that the economy is buoyant and OK just because business surveys and the jobs market are doing well.

And with higher inflation “few years” off, according to her speech yesterday, Mr Ellis says the big dangers to the economy is from weak wage growth (which is weaker than apparent) and the dangers this poses to consumption generally in the economy. She fears consumers might feel low income growth has become a fact of life and cut spending according, damaging the wider economy, demand and growth, and eventually jobs.

"Continued weak income growth presents a particular risk to the consumption outlook in the context of high household indebtedness. Households do not just wake up one day and collectively decide to pay down their debt. But if incomes turn out weaker than they expect, or some other adverse news should arise, the households carrying the most debt might feel they have to rein in their spending quite a bit.

"The living cost pressures that many households feel have therefore been an income story, not a price inflation story. Although utilities prices did increase significantly in some states in recent quarters, much of households’ regular spending has seen relatively little in the way of price increases for a number of years.

"Weak income growth can run below consumption growth for a time, but not forever. If households start to see this weakness in income growth as permanent, they are likely to change their spending patterns in response. We might be seeing this in the details of the consumption figures: growth in spending on discretionary items, like travel and eating out, has slowed while growth in spending on essentials has held up.”

Some from that supermarkets will do sort of OK (but Coles?), department stories and other chains depending on discretionary spending will find it tougher to sell, travel groups will also find it hard, and perhaps food and allied areas in cafes, fast food and lifestyle related retailing (and booze).

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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