July 26 (Bloomberg) -- Australia is starting to shake off its doldrums.
Shoppers are reopening their wallets after the country’s most prolonged consumer slump, defying a sovereign debt crisis in the euro region, a slowdown in Australia’s biggest export destination, China, and a levy on carbon emissions that political opponents call a tax.
Fueled by A$2 billion ($2.1 billion) in government carbon rebates and benefit checks paid out since May, as well as four interest-rate cuts since November, retail sales have risen for five months. The value of credit-card payments in May was the second-highest on record and consumer confidence is at its best level since February. The country’s largest electrical-goods chain, Harvey Norman Holdings Ltd., said lower-income areas that received rebates are outperforming richer neighborhoods, while biggest retailer Woolworths Ltd. said less-affluent shoppers were buying Apple Inc.’s iPad.
“You put dollars in people’s pockets and they’ll spend it,” Craig James, chief economist at Commonwealth Bank of Australia’s CommSec brokerage, said by phone. “It’s a perfect storm of positive factors: the oil price coming down, interest-rate cuts and government handouts.”
It’s early to judge whether Australia’s retail sector has turned the corner, James said. Home prices, which affect the mood of shoppers, were down 3.6 percent in June from a year earlier in state and territory capital cities, according to an index published by data companies RP Data and Rismark International. “There’s still a degree of angst in the community,” said James.
While the effects of the stimulus may diminish toward year-end, at present the benefits appear widespread, said Michael Simotas, a consumer analyst at Deutsche Bank AG in Sydney.
“Every unlisted retailer we’ve spoken to has seen a sharp uplift,” he said. Basic goods and discount stores such as those owned by Woolworths, Wesfarmers Ltd. and Premier Investments Ltd. will benefit in the short term, Tony Wilson, an analyst at Evans & Partners Pty. said by e-mail.
Wesfarmers’ Target chain, the country’s largest department-store network with 301 outlets, put in its best performance in at least 2-1/2 half years in the three months through June, the company said today. Sales at stores open at least 12 months rose 4.5 percent from a year earlier, Wesfarmers said. The measure declined in eight out of the previous nine quarters.
Myer Holdings Ltd., Australia’s largest listed department store company, rose the most in nearly three weeks, climbing 3.3 percent to A$1.74 at the close of trade in Sydney. Wesfarmers and supermarket wholesaler Metcash Ltd. both rose the most in a week and Harvey Norman broke a three-day falling streak.
Other major economies have seen a shopper slowdown. U.S. retail sales fell for a third month in June and companies including Procter & Gamble Co. and Tiffany & Co. have cut profit projections. In Hong Kong, a favorite destination for mainland Chinese shoppers, May retail sales grew at the slowest pace since 2009.
Australia’s performance illustrates its good fortune in having interest rates high enough for central bankers to stimulate the economy through conventional means, Tom Kennedy, an economist at JPMorgan Chase & Co. in Sydney, said by phone.
Its key interest rate, still 3.5 percent after 1.25 percentage points of cuts since November, allows room to ease conditions further compared to the U.S., euro area, Japan, and the U.K., where rates are already below 1 percent.
Households have also benefited from a 10 percent fall in gasoline prices since mid-May and stimulus money as a rebate against the carbon levy introduced July 1, said George Tharenou, a senior economist at UBS AG.
While average electricity bills will go up by about 10 percent because of the carbon price and household costs will rise by an average of A$9.90 a week, tax cuts and benefit payments will average A$10.10 a week, Australia’s Treasurer Wayne Swan said July 8. About 4 million of Australia’s 9.1 million households will be better off, with another 2 million receiving assistance, he said.
Australia expects to raise A$24.7 billion over four years from the carbon levy. Those funds, combined with a budget projected to return to a surplus of 0.4 percent of gross domestic product next year and government debt levels less than half those in the U.S. and major European economies, give the government more scope to push stimulus to lower-income households.
Australia hasn’t suffered a recession since 1991 and a mining boom driven largely by surging Chinese steel production helped it ride out the 2008 financial crisis. Still, the retail industry weakened last year, reflecting seven interest-rate increases in 13 months to contain inflation amid a mining boom, as well as growing fears about the global economy.
Spending on clothing and footwear fell to its lowest levels in 21 months in the September quarter. Shares in retailers including surf-wear maker Billabong International Ltd., electronics retailer JB Hi-Fi Ltd., and camping-gear seller Kathmandu Holdings Ltd. slumped by more than a quarter in December after they said first-half earnings would miss forecasts.
The strengthening Australian dollar also squeezed local retailers by lowering the cost of imported goods.
While the stronger currency hit trade-exposed businesses, the mining boom has kept unemployment close to 30-year lows. The gains in the Australian dollar has also lowered the cost of imports, making goods cheaper for shoppers.
In a sign of the improving outlook for the industry, Woolworths this week posted fourth-quarter sales growth that came in at more than double analyst estimates.
At Big W, the retailer’s discount department store chain, the carbon rebates seem to have stoked sales of Apple Inc.’s iPad to lower-income customers, the division’s director, Julie Coates, told investors this month.
A gauge of discretionary stocks on the S&P/ASX 200 index put in its best first-half performance since 2009 during the six months ended June 30.
Groups most affected by the stimulus money seem to have been spurring sales at some branches of Harvey Norman, Australia’s largest electrical goods company, co-founder and chairman Gerry Harvey said in an interview.
“If you give a whole heap of money to people earning under A$100,000 you’ll get the benefit in those areas,” Harvey said.
Even so, the sales pick-up seen during June had mostly washed out in July, Harvey said, and interest rate cuts don’t seem to be having as much of an effect as previously.
That’s no surprise, Reserve Bank of Australia governor Glenn Stevens said in a June speech. The conditions that supported the retail sector until 2007 were “unusual” and won’t be repeated soon.
“If there were business strategies that assumed a resumption of the earlier trend, they will surely be disappointed,” he said.
Since the financial crisis, Australia’s saving rate, a determinant of spending levels, hasn’t dropped below 8 percent once, and remains at levels more than double those in the U.S.
Annual growth in retail spending hit 4 percent in June, the highest level since 2009, and should hold at that rate for at least for the rest of the year, according to UBS’s Tharenou. That’s below the long-term average of 6 percent.
Even so, the rebates and cash stimulus will mean that over the next year “people will have a little extra each month” he said.
The cash flow already appears to be feeding into consumer sentiment, said Rebecca Huntley, consumer executive director of market research group Ipsos’s local division. Focus-group surveys are showing less attention to pessimistic themes such as the global economy, she said. “We may be starting to see some slivers of sunshine.”
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