A Shortcut to Understanding the Aussie Economy

A Shortcut to Understanding the Aussie Economy

Dear Reader,

My, my, my…haven’t things turned?

For over two years now, anytime I’ve brought up the word ‘retail’ in these pages, I’ve ended up with a special one-on-one chat with my publisher.

A friendly little talk, to point out that perhaps our subscribers don’t care so much about shopping. That maybe, retail isn’t a sector I should spend so much time analysing.

I mean, gold is your jam,’ he’d remind me. ‘Plus, Australia is a mining country,’ he’d say in between sips of a long black. ‘And the banks. They dominate the ASX. These are probably all stories that would resonate better with our readers.

Yet, that’s exactly the problem.

By looking at those sectors as more important, you miss out on valuable details.

Being informed on the Aussie retail sector, means you have a shortcut to understanding the Aussie economy.

And until recently, no one gave a rat’s backside about what was happening there.

Except now, it’s all the papers can talk about…

Market expert Shae Russell predicts five knock-on effects of the recent market crash that could be even bigger threats to the average investor’s wealth than the crash itself.

What did you make?

For years understanding the retail sector has been dismissed as something trivial.

Implying that knowing how to read shoppers is merely a topic for ladies who lunch. Serious analysts would never waste that much time understanding the buying of things…

Yet consumption is critical to Australia’s economic growth.

And not just the things you buy at the shops either.

Services like hairdressers, personal trainers, physio therapists, and finance consultants — for example — are all critical parts of our total consumption growth.

But here’s a tip.

You are a consumer first and an investor second.

That and the entire retail sector is Australia’s crystal ball.

If you know what the consumer is going to do, then you can predict the outcome for the Aussie economy.

Think about it.

What did you buy before going into lockdown?

In very early March when I caught wind of what might happen, I bought a new computer screen, some supplies for home schooling, and stocked up on trackie pants for the kids and I, in case Target was closed.

I have no idea what you may have bought.

But the point is to spend more time at home and keep the kids’ schooling up and continue to work, I had to go get more things in order for things to go on as normal.

And millions of Australians around the country did the exact same thing as me. Bought a couple of ‘new essentials’ to keep life running while working and schooling at home.

But I ask you this…what did you make?

What did you go home and make to keep your life running?

Chances are…nothing.

If you made something, it may have been to while away the iso hours. A new — or old — hobby to keep you busy in these bizarre times.

And that’s exactly my point.

We are a nation of buyers, not makers.

The only things we really make are our overpriced buildings, a handful of medical supplies, some food, and a bunch of semi-processed rocks.

We don’t have a manufacturing sector to fall back on. We outsourced that to the lowest bidder…

Open your wallets

‘When will consumers open their wallets,’ I see the headlines beg.

Day after day I’m seeing editorial dedicated to people buying things. Or wistfully asking when people will buy more things.

‘Shoppers return as stores reopen,’ the Australian Financial Review said in late May.

‘Dead malls as a result of COVID-19’ — said another last week.

‘Beauty, nail salon spending surges as Aussies rush back to parlours’ — Channel 9 told us.

The buying and selling of things contributes more to Australia’s gross domestic product (GDP) than anything else.

Big trucks on the news make for good headlines. Videos of smelting pots provide a nice distraction while a presenter talks about price rises or falls.

Plus, a relatively high Aussie dollar makes Australians feel wealthy, as it makes imported goods cheaper.

Hearing these things repeatedly adds to overall market sentiment. It looks like the economy is on a roll. In these dark times, at least something is bringing in some coin for Australia, right?

True. The mining sector makes some Australians an awful lot of money. But not all.

And the higher commodity prices go, the more it distorts our gross domestic product figure each year. Making our overall income look good…but again, those profits are largely kept to one part of Australia.

The problem is that mining exports only account for 10% of total GDP. Add in agriculture and mining, and the exporting of farming products accounts for a total of 12% of GDP.

That’s it.

Whereas consumption — the buying and selling of goods and services inside Australia — makes up 55% of GDP.

So, what we buy and sell is far more important for Australia’s overall economic health — and individual wealth — than what’s happening with a bunch of rocks we dig out of the ground.

Our gross domestic product (GDP) growth depends on people spending money within the economy. Not iron ore. Not gold. Not natural gas.

The junk you buy at the shops and the services you pay for — so you don’t have to do the job yourself — are the lifeblood of Australia’s growth.

And it’s the very one that will be critical to how we move out of the economic impacts of COVID-19.

Spend, spend, spend

Every single day I’ve been greeted by headlines asking questions about when people will start spending money again.

Suddenly something so trivial and long ignored by many analysts is becoming a critical headline.

The fact is if Aussies don’t start spending money on the fun things, the economy won’t get going again.

Just because something is easy to understand doesn’t mean it should be dismissed.

All Aussie investors should have a good understanding of Australia’s retail environment.

In other words, use the retail market to understand consumer behaviour. Knowing this gives you an edge in today’s market.

And here’s a tip:

Australia’s economic fortunes rest on what the consumer does next.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia