Australian retail has had a challenging 12 months. We expect we are past the worst for this sales cycle with a gradual improvement in growth over the next 12 months. We forecast retail sales growth of 2.9% in FY25e, up from 1.8% in FY24e. The sectors likely to see the strongest recovery are household goods, supermarkets and online. Some categories are still vulnerable to a correction in volumes such as liquor, cafes & restaurants and fashion. While there is an upswing, it will be mild and leave growth rates below trend for the next three years in our view given the low household savings rate and decelerating population growth.

The link provides a presentation associated with a webinar we held. The webinar addressed the updated outlook for retail sales and key drivers that could trigger an improvement in spending. In the presentation, we also address the outlook for interest rates, price inflation and population growth. While tax cuts will help sales later in 2024, lower retail price inflation, higher unemployment and a shift of spend to travel and automobiles will all limit the upside in industry sales growth. The presentation also includes insights about retailer profitability, inventory levels, and sales trajectory following results from the 6 months to December 2023.

We have updated our retail sales outlook, with modestly higher forecasts for 2024. We forecast 2.7% growth (up from 2.5% previously). We have lifted our non-food forecasts, but lowered food & liquor forecasts. The prevailing sales trends are very soft but should improve in the back-half of calendar 2024 as income tax cuts flow through. We only see a modest pick up because lower retail price inflation will constrain overall sales growth in FY25e.

Income tax cuts that come into effect from 1 July 2024 are worth $20 billion over the next fiscal year. While a big number on the surface, we feel the figure needs context given other factors such as changes in employment, living costs and savings could offset some of the benefit. Isolating the tax cuts, we estimate about $5 billion could make its way into retail. All else equal, this is a 1.1% boost to retail sales growth for FY25e. However, a 2.5% drop in hours worked, 1.4% rise in either the unemployment, living costs or the savings rate are equivalent to $20 billion and could neutralise the benefit to retail from tax cuts.

Australian retail has had a difficult 2023 with below trend sales growth of 3.1%. We expect another challenging year with growth of 2.5% for 2024. While a weaker year, it will be a tale of two halves with softer growth in the January-June period and better growth for July-December. Moreover, we expect slowing sales in at-home food & liquor and a sharper slowdown in cafes, restaurants and takeaway food. We expect an improving rate of growth for non-food retail. While tax cuts will help sales later in 2024, lower retail price inflation, higher unemployment and a shift of spend to travel will all limit the upside in industry sales growth.

Australians saved a lot of money during COVID-19. They saved $246 billion more than usual in fact. Bank data shows that households have now started drawing on that savings buffer. Is this good news or bad news? Do all demographics have savings buffers? We use demographic data to answer these questions and find that all income groups (lowest to highest) have some buffers. Amongst age cohorts, the groups aged 25 or older have saved more. Younger people have few buffers. The excess savings will result in a gradual slowdown in retail spending, potentially milder than many fear. The impact of higher interest rates will hurt higher income households the most as they carry more debt relative to income. Those over 65 are net beneficiaries of higher rates. Given data on spending by demographics, liquor and food at-home are likely to outperform. Dining out and travel may suffer when higher income earners pull back on spending.

Australian retailers have begun to experience a slowdown in retail spending and it’s going to get tougher over the next 4-6 months. We expect FY24e retail industry sales to rise 1.5%, a slowdown from 9.0% growth in FY23e. While this may sound gloomy, a glass half full perspective is overall sales may not slow any further from the trends as at June 2023. The glass half-empty view is that we may not return towards trend sales growth until 2025. The willingness of households to tap into excess savings shapes our view that the downturn will be shallow. We also note that food inflation will prop up that sector until early 2024. The path of price inflation is likely to have a greater bearing on sales outcomes more so than retail volumes, which are already in decline.

The Fair Work Commission’s decision to increase wages for FY24e by 5.75% will create a headwind for retailers. The magnitude of the pressure will depend on the sales run-rate and given we are already in decline in non-food categories, the squeeze from rising costs and falling sales could lower earnings in FY24e by 8%-14% for many non-food retailers. Our review of consensus expectations suggests the market is too low on cost growth for Bunnings, Super Retail Group and Premier Investments. We also note that the Fair Work Commission suggested that future pay rises are more likely to be above inflation, which adds to risks in FY25e.

While retail sales have started 2023 at a healthy run-rate, a downturn is looming. In this report, we detail our forecast for retail sales and emphasise that the June 2023 quarter is likely to be much weaker in non-food with food retailing propped up by inflation. The downturn is just commencing and likely to last until the end of 2024. We forecast retail sales growth of 2% in 2023, compared with 11% achieved in 2022 and long-term trends of 5%.

Our view on retail sales is more positive over the next six months, but more cautious on calendar 2023. While the “fear” of higher interest rates makes headlines, the reality is the impact takes more than a year to show through as weaker spending. Near-term, higher wages, stored up savings and retail price inflation will support sales growth. We forecast retail sales to rise 3% in FY23e, down from 6% growth in FY22e. We expect FY23e household goods sales to fall 2%. Electronics, furniture, hardware will find it most difficult given the high baseline. Supermarkets should do well with food inflation driving 6% growth in FY23e. Two important swing factors are savings and inflation. A drop in savings to pre-COVID levels will help spending and inflation will partly offset lower volumes.