Can retail therapy fuel a COVID recovery?
Economist - Investment Strategy & Dynamic Markets Sydney, Australia
The effects of the COVD-19 pandemic on the economy has changed consumer behaviours with Australians expecting to saving more and spending less this year1, according to the Australian Bureau of Statistics’ household survey, with options for recreation and entertainment curtailed and uncertainty leading many to tighten their wallets. Despite this trend, it might actually come as a surprise to some that retail spend is actually up strongly, year on year, although preliminary data suggests that monthly turnover fell 1.5% in September on the back of a 4% drop in August2.
It has been a wild ride, with March’s 8.5% seasonally adjusted increase preceding a fall of 17.7% through April, followed by a 16.9% recovery in May, and a solid if less spectacular growth through June and July before the recent slump. While these fluctuations make sense in the broader context of the first stages of the pandemic (panic buying, lockdowns, reopenings and more), strong annual growth in retail spending can be credited largely to the effects of stimulus measures injecting cash into the economy. The list of sources of these funds is extensive, and includes the boost to JobSeeker supplements, two rounds of one-off payments to welfare recipients and pensioners, early access to superannuation, free childcare and mortgage deferrals.
Additional measures in this year’s Federal Budget will add to the effect, particularly the fast-tracked and backdated ‘Stage 2’ income tax cuts, which at an aggregate level should more than offset the reduction in JobKeeper and JobSeeker payments from 28 September.
This latest slowdown does reflect the drag from lockdowns and curfews in Victoria, but it’s broader than that. Retail spending actually fell across every state and territory except the Northern Territory in September, indicating that a correction could be taking place in the wake of forward-purchasing in previous months. The pattern of spending certainly supports this theory, with growth in areas linked to mobility, such as department stores and cafes and restaurants.
This state of affairs could keep retail spending depressed over the short term, although the easing of restrictions in Victoria will go some way towards mitigating that effect until the full effect of the Budget tax cuts kicks in, most likely before the end of the year. Further help from interest rate cuts is also a distinct likelihood over the next month.
Retail volumes negatively impacted on GDP growth in the June quarter, contributing -0.6% to the record 7% overall decline. On our estimates, retail spending should add 0.9% to growth in the September quarter, helping lift the economy back towards positive growth.
However, retail only comprises 30% of total consumer spending, and broader problems are likely to persist in other areas of consumer spending, such as travel, recreation and personal services, which are likely to continue to suffer the ill-effects of COVID restrictions.
The bottom line for investors is to not put too much stock in monthly declines in retail spending; at this stage the picture is one of strong annual growth fuelled by fiscal and to a lesser extent monetary stimulus. That said, growth in retail spending is unlikely on its own to be sufficient to engineer a full recovery without further developments in the way we respond to the virus.
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Important notes
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