Retail growth is now at its strongest for more than four years, but a fresh report predicts that this is just the beginning.
The thirteenth edition of the AFGC CHEP Retail Index has revealed that year-on-year growth in retail sales, which have continued to lift in the early months of this year, and a further strengthening is expected.
The AFGC CHEP Retail Index, powered by Deloitte Analytics, aims to provide unique insight into the performance of the Australian retail market, using a combination of robust data sources.
The Index has been touted as a strong predictor of trend growth in nominal retail spending with a high degree of accuracy, activity in the Australian retail sector.
According to the latest results, The Index was 5.8 per cent higher in March 2014 compared to March 2013 with a turnover over of $23.01 billion.
Growth in the Index is expected to lift further with an increase of 6.6 per cent over the 12 months to May 2014 when retail trade turnover is forecast to reach $23.62 billion.
Year-on-year retail trade growth for the June quarter is also expected to be 6.6 per cent.
Indeed, latest figures from the Australian Bureau of Statistics (ABS) retail data have confirmed that retail sales picked up strongly late last year, with retailers benefiting from an extended period of low interest rates.
ABS data shows that retail sales growth (in trend, nominal terms) has steadily picked up from 1.9 per cent in June 2013 to 5.9 per cent in February 2014. The current pace of retail sales growth is the strongest for more than four years.
The Australian retail environment has brightened as record low interest rates free up disposable income for spending.
Low interest rates have also kick started a recovery in the housing market, with strengthening house prices along with a strongly performing Australian sharemarket increasing household wealth and supporting consumer confidence.
That has encouraged increased spending out of current income, with the high household savings rate edging down in late 2013.
As a result, retail performance has generally improved across all sectors since the middle of last year.
Food retailers have seen sales growth pick up to be in line with the broader retail benchmark, while clothing retailers are continuing to see strong sales growth of around seven per cent.
Household goods retailers have seen an improvement in sales growth to around five per cent.
The only retail sector still struggling is department stores, which has not recorded any sales growth over the past year, and continues to lose market share.
Retail performance across the states is also changing. As resources construction activity slows, the major mining states have fallen behind the rest of the nation.
Western Australia is now seeing weak retail sales growth of around two and a half per cent over the past year, compared with retail sales growth of around seven per cent in Victoria and almost eight per cent in NSW.
While retail sales have lifted in recent months on the back of low interest rates, wealth gains and housing gains, continuing retail strength will not be sustainable without an improvement in broader economic conditions.
Most fundamentally, labour income growth has been weak, with jobs growth modest and recent wage gains failing to keep pace with inflation.
Significant Federal budget tightening can also be expected over the next few months to further restrain income gains.
Fortunately, low interest rates and falls in the value of the Australian dollar over the past year are providing a significant stimulus to the Australian economy.
There have already been some signs of improvement in the labour market in recent months, while a big increase in building approvals over 2013 is likely to translate into a strong lift in housing construction this year, providing a further support to retail spending, particularly household goods and other consumer durables.
Overall, the Australian retail environment is improving and as the Australian economy and labour market strengthens, retailers may see further improvement in sales results. That result would be consistent with the latest AFGC CHEP Retail Index data.
