Australia in the grips of retail slump due to rising prices and interest rates

Australia in Retail Recession due to Inflation and Interest Hike, Deloitte Report indicates

According to a recent report by Deloitte Access Economics, the ongoing inflation and higher interest rates have resulted in a “Retail Recession” in Australia. The report indicates that retail turnover has sunk 0.6% in the March quarter, twice the pace of the decline in the last quarter of 2022, once inflation is stripped out. The June quarter is likely to see another drop in retail sales, making it three consecutive quarters of decline. Lead author of the report, David Rumbens, asserted that this retail recession does not come as a surprise as consumer caution is expected to extend further, resulting in a broader-based recession later in the year.

Real-Terms Retail Spending Falling Indicative of Excessive Demand Removal Efforts

The Reserve Bank is likely to find the data indicating the fall in real-terms retail spending pleasing. The Bank has raised interest rates 12 times in 13 months, with the recent hike implemented earlier this week, to remove excessive demand in the economy. Governor Philip Lowe has reiterated that “the very mixed experience across households and firms” is a complicating factor in deciding on how high the interest rates should go.

Household Spending Analysis and Implications

The national accounts data from the March quarter showed a nominal increase of 0.2% in household spending, which is the weakest since Covid lockdowns across eastern Australia in the September quarter of 2021. Consumers utilize their savings to keep the energy and other essentials expenses adding up in the expenditure. The Commonwealth Bank of Australia (CBA) has indicated that the March quarter figures reveal that the economy contracted on a per capita basis, and the June-quarter numbers will likely confirm another decrease. CBA has set the likelihood of recession at 50% in the second half of 2023 when the economy experiences two consecutive quarters of GDP contraction.

Prospects of Further Interest Rate Hikes by RBA

As per the economists at CBA have raised their expectations of the Reserve Bank of Australia(RBA) lifting its cash rate. They predict an additional 25 basis-point increase in the cash rate equal to a peak rate of 4.35%, specific to the August board meeting. There is also the risk of a 25bp rate rise in both July and August, which would lead to an increase in the cash rate up to 4.6%.

Population Growth aiding Australia‘s Retail Recovery Issues

The Deloitte report indicates that population growth can aid in bringing about a change in Australia‘s retail recession, with 400,000 net overseas migration in the year ending this month and another 315,000 expected in 2023-24. Increased overseas student numbers would also serve as an aid. The total real retail turnover is expected to rise from minus-0.7% across calendar year 2023 to 1.3% in calendar 2024, owing to more people and wallets opening up. The report suggests that the reduction in inflation would lead to positive wage growth in 2024.

Recommendations and Conclusion

It is clear that the economy has been hard hit by the inflation and interest rate cycle that the Reserve Bank of Australia has implemented; however, Australians can look up to the positive population growth and the potential decrease in inflation in 2024 to aid in their retail woes. In the meantime, households and firms should remain vigilant and maintain a cautious approach to reduce further financial strain and recessionary impacts on the economy.