Fund manager claims Australian households in recession

Australian households are in recession according to fund management giant Perpetual, meaning retailers will continue to struggle against household deleveraging and a structural shift towards online sales driven by young people with disposable incomes.

Matthew Sherwood, head of investment market research at Perpetual, says low unemployment, large rises in domestic income and improved household balance sheets are being outweighed by higher costs of living, declining asset prices and concern over the global outlook.

“There is little doubt that despite Australia’s great economic prosperity, despite our growing trade exposure to the Chinese commodity juggernaut and despite a very low unemployment rate, the Australian household sector is in recession,” Sherwood says in a three-page report.

“To an outsider, an economy of solid growth with unemployment below 5% and annual labour income growth of 8.3% (relative to a post-1990 average of 5.8%), retail spending growth three-quarters below its 50-year average might seem massively inconsistent – but it is a reality.”

“Indeed, annual growth in retail sales is down to a near record low of 2.2%, which is less than the average level recorded during recessions (8% in nominal terms) and the growth rate recorded in four of those past five economic downturns.”

Sherwood says the following have created a perfect storm:

• Rising petrol and utility prices.
• Higher insurance premiums and the flood level.
• Interest rates.
• A desire to reduce household debts.
• Declining asset prices.
• A willingness to spend online among young people.
• Uncertainty over the global outlook.

And Sherwood warns that a pickup is in doubt any time soon.

“If history is any guide, the spending drought could continue to deteriorate as trends in consumer confidence tend to lead to spending trends by six months.”

Looking at large retailers, Sherwood says discretionary retail companies have underperformed the broader sharemarket since September 2009, and tips single-digit declines in the upcoming reporting season.

“Looking forward, department stores are likely to continue losing sales in areas such as electronics, clothing and household goods,” he says.

“Elsewhere, new market entrants such as Zara (with cheap prices and new stock every two or so weeks) are making a presence, online retailers continue to gain market share, which combined with the introduction of global pricing (which will amplify the trend of price deflation), will make the retail game a very hard one to win.”

But Harley Dale, chief economist at the Housing Industry of Australia, says he wouldn’t go so far to say that households are in recession.

“My own view is we are probably drawing a long bow to call it a recession,” Dale says.

“There are enough things scaring the bejesus out of households at the moment.”

“It’s clear budgets are tight and retail sales are struggling, and existing home prices are flat to a little bit down.”

According to Dale, expectations the resources boom would be spreading wealth now throughout the country are misguided.

“I think we learnt from the resources boom, that whenever it occurs, we wouldn’t expect to see it as early as 2011,” Dale says.

“I’d see that as more of a 2013 story.”

“But from my side, our forecast is home building falling quite considerably over the next six to 12 months.”

Adam Carr, chief economist at ICAP Australia, is more upbeat and says retailing is merely returning to pre-boom levels.

“I think the broad spread of indicators shows retailing is running at trend or just below,” Carr says.

“I think this is the new world order. Pre-GFC spending won’t be replicated, but that doesn’t mean that spending’s weak now – it just means it was strong before.”

“Remember that prices have fallen, creating a nominal illusion that sales are falling.”

“The other issue is competition – Australian retailers have had it pretty good in terms of their margins, but now Australians have figured out they have a choices, whether it’s buying online or travelling overseas.”

Carr also pointed to healthy volume levels and the recent report from Australia’s largest retailer, Woolworths.

In his report, Sherwood also suggested the Reserve Bank’s take on Australia’s economic conditions might be too optimistic.

“The spending strike appears to suggest that households may not be as strong as the RBA believes,” he says.

But he casts doubt on the likelihood of a rate cut anytime soon, given inflation is “uncomfortably high” and growth is set to strengthen in the year ahead.

Having said that, Sherwood says the Aussie dollar might end up falling if mining investment turns out to be “not as egregious as many expect”, meaning economic growth could be less than estimated.

According to the most recent Australian Bureau of Statistics figures, retail sales fell 0.6% in May, following a 1.2% rise the previous month.