The private recession gripping Australia

The private recession gripping Australia

The minute my boss sees the words ‘retail’ and ‘shopping’ roll across the screen in the latest Daily Reckoning issue, I get sent an email asking, ‘Have you got a minute?’

We have a chat.

He reminds me that people don’t really care about new bags or shoes or puffer jackets.

In turn, I remind him that the retail sector is the Aussie economy’s crystal ball.

Why?

Because you couldn’t ask for a better barometer of individual prosperity in Australia.

And right now, the retail crystal ball is showing us grim times ahead…

It’s more than shoes and overpriced puffer jackets

We see the reports.

The Australian Financial Review told me this morning that the average retiree is now self-funded.

Just yesterday, I read how the booming iron ore price — now US$116 and flying higher — will boost our gross domestic product. Especially as the Aussie dollar is worth about 69 US cents.

Then there’s the endless chatter about house price moves that I see across various investment news sources.

Or stories about a small-cap sector about to revolutionise healthcare.

Those, my boss tells me in our one-on-one chat, are the ideas that are probably more valuable to investors.

And that’s part of the problem.

Many people assume that commodities or a hot new sector or the revival of an old sector is important economic news.

Don’t get me wrong. They have their place.

But commodities exports contribute roughly 10% to Australia’s total gross domestic product. Agricultural products contribute another 7-8%, depending on the farming conditions.

Whereas consumption? Well, that accounts for more than 55% of GDP.

And consumption is so much more than just retail…it covers our entire services economy.

Under the consumption banner is food and accommodation services, arts and recreation services, financial service providers, as well as retail.

This includes all sorts of different workers, like personal trainers, retail store managers, baristas, kitchen hands, house cleaners, Uber drivers, tour guides, hairdressers, mechanics, animal trainers and mortgage brokers.

Altogether, the entire consumption sector of the economy employs almost three million people. That’s 30% of our workforce contributing to one part of the economy.[1]

The problem, though, is that half of the total consumption figure comes from retail spending.

So, the essentials like food…and the fun things like shoes and bags.

We are a nation that buys and sells things.

Which means the retail sector makes up a large chunk of national income.

And a crucial part of being able to gauge the health of our economy.

If you watch what’s happening with retail data, you can see what’s happening in the economy before everyone else…

And then you can plan out investments ahead of time to take advantages of a sector about to boom…or avoid a sector in decline.

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Discount stores can’t make a buck

For those who like to shop, June brings the good times.

Clothing and footwear retailers have seasonal stock they want to clear.

Tax time is just around the corner. So electronic stores wave all sorts of discounts on things you don’t really need, in a bid to convince you that this item will help offset the amount of tax you pay.

While not as crucial as the Christmas trading period, the June-July sales are important to clear the decks, so retailers can make room for all the stuff they’ll try and flog you six months from now.

And for many Aussie retailers, it can offer a nice tailwind to end of financial year (EOFY) results.

The problem is, June isn’t looking good.

Already, the NAB Cashless Retail Sales Index says retail spending dived in the month of April.

Sure, the data is two months old. But NAB points out that all categories of online spending dropped.[2]

While one month doesn’t make a trend, it was the ‘even’ decline across sectors that we need to pay attention to. We already know that retail spending is falling for this year. The question is: Will it continue to drop evenly, or will some categories not fall as much?

The NAB data also tells us that discretionary retail (the fun stuff we don’t need) is falling more than non-discretionary retail (the necessities).

Then there’s the latest developments with two of our biggest discount retailers.

Last week, Wesfarmers-owned Kmart and Target announced their annual earnings would decline to $515-565 million for the 2019 financial year.

The worst-case scenario is a drop of about $103 million in combined earnings.[3][4]

That could potentially result in a 17% decline in total revenue between the two.

More to the point, this is a vital signal for investors as to what’s happening in Australia.

That is, the belts are tightening.

Discount department stores and retailers generally fair better when the economic woes kick in. This is called the trading down effect.

However, when money gets really tough for households, every retailer sees sales fall.

But both Target and Kmart sell mostly discretionary items. Cheap, mass-produced stuff. The sort of stuff we can really live without.

The stuff we’d buy when we feel wealthy…but the sort of things we would forgo when the purse strings are stretched too far.

The fact that retailers like Kmart and Target are likely to report less revenue this year shows us that even the discount stores can’t make a buck.

The little things explain the big picture

Just last week, the RBA warned that the retail sector was the weakest part of the Australian economy.

Some boffin even tried to blame the decline in retail on the fact that most stores won’t provide free plastic bags anymore.

However, when you read that sort of information, I want you to put a different spin on it.

The retail sector isn’t ‘the weakest part of the Australian economy’. It’s simply showing the danger we are in.

The warnings signs are here — in the form of discount retailers reducing their estimated earnings. People are spending less online.

The official government data might not say we are in a recession, but the reduced spending in the Aussie retail sector tells us that Aussies are facing their own private recession.

And for an economy that has based its entire fortune on selling you things you don’t need, that could have dire consequences.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia