Retail weakness the ‘new normal’ – UBS says growth will be poor for two or three years

Retail conditions aren’t weak – they’re the new normal, investment bank UBS says. And save for an interest rate or a post-Christmas sales flurry, they’re unlikely to pick up any time soon.

In a report entitled Cautious consumer –the ‘new normal’, UBS says with jobs growth slowing, the Reserve Bank unlikely to cut rates and global economic turmoil likely to continue to batter consumer confidence “there will likely be a lower trend for wealth, credit and consumption.”

“Retail sales will continue to be plagued by structural shifts over the medium-term,” UBS says.

“We argue the new trend of consumption will be closer to 3%, below its pre-GFC average close to 4%,” UBS says.

“Hence, the current 3.25% year-on-year pace should be seen as close to the ‘new normal’. Further, the trend for retail sales is likely to be closer to 4%, significantly below the pre-GFC trend around 6%.”

“There is scope for retail to pick up moderately from its current near-record low pace of 1.5%, especially if the RBA cut rates. But with the RBA expecting an ongoing cautious consumer, market pricing of massive rate cuts is unlikely (absent a crisis).”

Assuming no crisis, UBS expects the RBA to sit steady, lifting just twice next year to end 2012 at 5.25% as global turmoil and the two-speed economy trumps “uncomfortably high” inflation and wage pressures.

“With rates likely to rise in the next one-to-two years, interest rate sensitive sectors will remain under pressure. Flat house prices, poor affordability, and some moderate negative wealth effects should lean both against housing and consumer spending.”

“We expect consumption growth to recover modestly through 2011, but not to an ‘above-trend’ rate.”

There’s one glimmer of hope for retailers: That consumers will ‘repent’ from their caution and spend up big during the post-Christmas sales.

UBS also points to strong household cash flow, high savings levels, low unemployment levels and “elevated” confidence as providing scope for consumer spending to reach a trend pace over the next year. 

“We nonetheless remain structurally bearish the retail subsector on a two-to-three year view, given persistent high interest rates, the high Australian dollar and more rapid growth in services prices.”

National Retailers Association spokesperson Michael Lonie says he wouldn’t disagree with the bearish report, with the ageing population, the increased spending on services and technology and online retail sales all playing a part.

“It’s not just a cyclical change; it’s quite clearly a structural change. It’s never going to be what it was like the past two decades.”

Lonie says with few retailers likely to get 5-6% year-on-year growth, the rationalisation will have a widespread impact across the economy.

He expects marginal stores will close over the next 18-24 months, rosters will be revisited and profits will take precedence over chasing market share.

“It’s quite likely that we won’t see any upswing until the end of the first quarter of 2012, which is going to make Christmas pretty ugly.”

The report follows comments by RBA assistant governor Philip Lowe that there are “significant changes in saving and spending patterns taking place in Australia.”

“The effects of these changes are probably most pronounced in the retail sector, with both increased saving and the switch towards services lessening growth in spending on goods. As a result, conditions are quite difficult for many retailers,” Lowe concluded.