CHEP Retail Index: clouds on the horizon

The sixteenth edition of the AFGC CHEP Retail Index indicates that Christmas trading may have caused the last month of year on year growth above 4% in retail sales for a while. 

The Index was 4.5% higher in December 2014 compared to December 2013, with its turnover of $23.75 billion. This was a slightly higher rate of growth from 4.2% in September 2014. On a quarterly basis, the Index was 4.4% cent higher in the December quarter 2014 compared to the December quarter 2013.

It’s not all good news, even though the sales result for retailers over the year to November 2014 was stronger than the forecast in the previous AFGC CHEP Retail Index (4.5% over the year to November 2014 versus the prediction of 3.2% growth). Retailers are likely to have been disappointed given the stronger rate of sales growth seen in early 2014. Australian Bureau of Statistics data shows that retail sales growth (in trend, nominal terms) has already slowed from a peak of 5.7% in January 2014 to 4.5% in November 2014. 

Moreover, growth in the Index is expected to slow over the first few months of 2015, to 2.5% over the 12 months to February 2015 and 2.4% over the 12 months to the March quarter 2015.

The lengthy period of low interest rates has provided significant support for retail sales growth, but a number of other factors have continued to weigh on retail sales. In particular, household income growth has remained below average reflecting weak growth in wages while the unemployment rate has slowly drifted higher and is now at the highest level in over a decade. Consumer sentiment remained at a below average level during the closing months of 2014.

The household goods sector has performed at the strongest levels according to ABS data, gaining the most benefit from cheap credit conditions and strengthening housing activity on the back of low interest rates. Food retailing has also remained robust, outperforming the broader retail benchmark over the past year. In contrast, clothing retailers and department stores have not seen sales growth in their sectors over the past year. 

Retail has been strongest in NSW, with retail sales growth of around 8% over the past year. Victoria has also seen above average retail sales growth of around 5%. All other states and territories have performed below the national retail sales average. It is notable that the weakest retail sales growth is now being seen in the mining jurisdictions of Western Australia, Queensland, and the Northern Territory where recent falls in commodity prices and the downturn underway in resource construction activity is taking its biggest toll.

So what’s ahead? CHEP predicts that the low interest rate environment should remain broadly supportive of retail spending in the early months of 2015. The sharp fall seen in crude oil prices in the second half of 2014 is also now flowing through into lower petrol prices for Australian consumers and if it is sustained, it will help to free up income for discretionary retail spending and provide a boost to consumer sentiment. 

But Australia’s economy is still facing a challenging period as mining investment slows after the past decade’s mining boom while China’s economy is also slowing. The economic conditions have taken a toll on the labour market, which will need to strengthen if greater retail sales growth is
to be achieved over time. Meanwhile, the earlier gains in both the share market and house prices that helped to boost household wealth are now showing signs of levelling off.

The lower Australian dollar is positive news for Australian food and grocery exporters, however, the market remains tough for manufacturers. The recent fall in the Australian dollar will also place upward pressure on the retail prices of some imported goods.