Consumers dip into their savings to shop

Retail spending improved in 2017-18 despite household budgets remaining under pressure, thanks to consumers raiding their savings.

According to Deloitte Access Economics latest quarterly Retail Forecasts subscriber report, overall real retail sales grew 2.6 per cent in 2017-18, an improvement on the 1.9 per cent the year before.

“The household savings ratio fell to a decade-low one per cent in June 2018, a dramatic fall from the 4.7 per cent savings ratio in March 2017,” says Deloitte Access Economics partner and Retail Forecasts principal author, David Rumbens.

“With income growth stagnating and some non-discretionary prices rising strongly, many households turned to their savings to support spending.

“This decline, ongoing since 2015, has actually helped retailers. Consumers opened their wallets at the end of the financial year, with June quarter sales surprising on the upside.

“The growth trend is unlikely to continue in the second half of 2018, as household budgets continue to come under pressure from tepid wage growth, falling house prices, and rising non-discretionary costs.

“Stronger income growth will be needed going forward. Unemployment dropped to a six-year low in July, but there is still a fair bit of slack in the labour market. This will continue to limit wage growth through the rest of the year, although we do expect some improvement on this front.”

Rumbens says weaker consumer confidence will dampen spending on large items, while food will benefit from, albeit small, wage growth improvement.

“With the property market moderating and mortgage rates likely to rise, households may pull back on credit sensitive and more discretionary spending.

“But a small pick-up in wages will provide a broad-based boost to household incomes, and support spending on food, apparel and other staples.

“Intense competition and rising operating costs will weigh on many retailers, but those focused on the value they offer to the consumer are likely to do well in terms of both sales and profitability.

“Price conscious retailers are supporting discount department stores, but store closures across apparel operators suggest many continue to struggle,” he concludes.