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Retail forecast: Good times in store after mid-year “headwind”

Retailers should brace for “headwind” in the next six months before consumer sentiment picks up, according to a Deloitte economist.

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The “toughest” period for retailers is almost over, with consumer spending set to pick up following the federal election, David Rumbens from Deloitte Access Economics told the Mumbrella Retail Marketing Summit on Thursday morning.

A slowdown in spending as a result of stagnant wages and housing inflation will in 2019 will start to dampen consumer confidence after a positive year of sales growth, Rumbens said.

“If we look at the overall retail environment I can say going into 2019 retail looks like it’s going to have a lower rate of sales growth in 2019 then we’ve seen in the past. So it’s a bit of a step down,” he said.

“It’s a challenging outlook but if think of this as being low point of cycle and moving to income driven environment and moving as house prices start to level out to environment  where will see stronger growth over time.”

A slight slowdown in the Australian economy is attributable to the changing consumer sentiment, Rumbens said, with overall GDP growth at 1 per cent last year.

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“If we’ve got some slowing of the broader economy and consumers building up household debt something has to give and hence we’re seeing some slowing in sales growth by consumers. You’d expect most of that going to be seen through 2019 with the likely improvement through 2020,” he said.

But retailers need not fret, according to Rumbens, who described the downturn in spending as more “cyclical” as a result of the housing market than “structural.”

Consumers have been “spending beyond [their] means” Rumbens said, with spending over the past few years outrunning income growth. While this has been good news for retail sales over the past few years, the “slowdown has been on the cards for a while,” he said.

“You could say the economy has been delivering a tailwind to retailers over the past few years that’s now turned into something of a headwind.”

Good news mid-year

But a potential drop in housing prices could bring good news for retailers mid-year after the election, as consumer confidence picks up.

“We are starting to see housing prices pulling back to fair value so where is the worst of it? The worst of it is probably now and going into the middle of the year,” Rumbens said.

Consistent growth in jobs has also been good news for retailers, Mr Rumbens said, and is the main cause of the strong consumer spending that’s been seen in the past few years.

“One of the best measures of economic performance is jobs and clearly that’s been an area of stunning success in Australia over the past two years. We’ve had nearly 300,000 jobs created last year, and that comes on top of over 400,000 in 2017.”

A focus on wages growth in the coming election could also herald in good news for retailers, he told the audience.

“It’s something we can think of as supporting the sector mid-year – whether it’s  tax cuts or some form of other cuts, it will depend on who wins the election,” he said.

Getting through the slump

Retailers need to strengthen their offering in the coming six months to equip themselves for good times ahead, he said.

“Doing nothing is not a good idea,” Rumbens said, urging retailers to position themselves well in the market over the coming difficult months ahead of the windfall.

This means looking to foreign markets, collaborating and looking at partnerships and strategic acquisitions and finally looking to responsible practices for their brand, according to Rumbens.

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