How retail woes are hurting Gillard’s relationship with business: Kohler

Relations between the Federal Government and business are as bad as they’ve been for 40 years, and it’s not just because of the proposed carbon tax.

It’s because the biggest problem is not even being discussed, let alone dealt with, not that there’s a lot the Government can do about it anyway: the nation’s biggest employer – retailing – has been quietly struck down by Dutch disease because of online shopping.

Retailing is the bedrock of the economy, employing about 1.3 million people directly and touching millions of other lives through wholesaling, transport, manufacturing and farming.

The central paradox of the Australian economy is that even though national income is booming because of the commodities boom, retailing is close to, or in, recession. Retailing is only supposed to benefit from rising income.

It is the key reason, in my view, why the Gillard Government is making such heavy weather of the carbon tax, why business and consumer confidence is so soft despite very low unemployment, and why business people generally are more at odds with the Government than at any time since the Whitlam years.

Dutch disease is only meant to affect manufacturing and tourism. It happens when a nation’s currency rises as a result of a terms of trade boom that is caused by rising prices for one or more commodities – other exporters.

The term Dutch disease was apparently coined in 1977 by The Economist to describe what happened to the manufacturing sector of The Netherlands after the discovery of a large natural gas field in 1959.

In the classic economic modelling subsequently developed in the 1980s, the non-traded goods sectors such as services and retailing remain unaffected while in the traded goods sectors of the economy there are wildly different experiences.

The parts that are experiencing a price boom – in our case iron ore, coal and gold – do very well even though the currency rises, while manufacturing, tourism and agriculture suffer.

However there has been a dramatic change to this scenario in the modern era: retailing has been moved into the traded goods part of the economy by the internet.

Everywhere I go people talk about the amount of shopping they are now doing online. It’s not because it’s necessarily more convenient, in fact you usually have to wait for the product, you can’t try it on and you can’t get to know the shopkeeper.

It’s because the stuff is so cheap thanks to the high Australian dollar. More and more people I bump into speak in wonderment about the deals they are getting from overseas websites. Products, especially clothes, are less than half the price in Australian stores, it takes just few days to get here and usually includes free postage.

We’ve already seen this phenomenon devastate the bookstores with the closure of Borders and Angus and Robertson; now it’s moving to clothing and footwear and a wide range of other products.

The supermarkets are still doing okay because food shopping has not yet moved online in a big way, but the clothing retailers are suffering from this new form of Dutch disease in a big way.

The rag trade in Australia touches millions of lives and right now the traffic in their stores is rather mysteriously thinning out, or else those who come in are trying on clothes that they go home and buy online for half the price.

The woes of retailers caused by the rise of online are being added to by the increase in the savings rate, as Australians look to repair their balance sheets after the borrowing binge of 2002 to 2007.

Is there anything that can be done about all this? Not much. The Australian dollar will probably stay high for a long time, and word-of-mouth will ensure that online shopping continues to grow and silently kills the local retailing industry.

This is a big part of the reason why business generally is so antagonistic towards the carbon tax: retailing has suddenly become an unrecognised trade-exposed industry and its influence pervades everything.

This article first appeared on Business Spectator.