By Aimee Chanthadavong

The housing sector is expected to be a key player in retail recovery hopes, according to an August quarterly retail report from Deloitte Access Economics.

Neal Sarma, Deloitte Access Economics macroeconomic policy and forecasting manager, said as housing purchases start to lift there will also be an increase in retail spending.

"As new homes are built and families move into them, families tend to purchase new furniture and other household goods to fill their new home," he said.

"In the past, we’ve seen that a lift in housing construction has typically been associated with a lift in spending on household goods. As house prices rise, there’s also a wealth effect, where people feel more comfortable about their financial situation and may be more willing to spend."

The positive results are expected to show over the next two years. Inflation adjusted retail sales growth is predicted to record a 2.4 per cent gain in 2013-14, but low interest rates and some modest improvement in the jobs outlook from a lower Australian dollar may see retail growth pick up to 3.6 per cent in 2014-15.

"Australia’s economic growth has slowed and the unemployment rate is drifting upwards and that is affecting conditions in the retail sector," Sarma said.

"Eventually we do see a turn in the economic cycle, and lower interest rates and an improvement in the housing sector will help there, but we’re expecting conditions in the retail sector are likely to remain challenging in the near term while the underlying economic environment struggles to achieve much in the way of jobs and income growth."

At the moment, on a state by state basis, Western Australia and Queensland are leading with the strongest retail performance over the year to June.

"There are some big differences in underlying economic conditions across the states," Sarma said.

"Until recently the states with a larger exposure to the mining sector such as Western Australia and Queensland had been doing much better than the other states, but with the construction boom in Australia’s mining sector starting to wind down and commodity prices off their peaks, their outperformance is diminishing.:

However, Sarma noted that lower interest rates will deliver growth for NSW, Victoria and the ACT over the next year.

"Income growth is quite weak at the moment in Australia and that is having a knock on effect on retail," he said.

"We’re looking for low interest rates to support some increased spending on big ticket items and also help lift activity in the housing sector and the broader economy.  With interest rates likely to stay at low levels for the next two years, retailers should also see some benefit."