The latest ABS Retail Trade figures show that Australian retail turnover rose 1.1% in April 2011, seasonally adjusted, following a fall of 0.3% the previous month.

Turnover rose in Food retailing (0.9%), Other retailing (2.0%), Department stores (3.6%), Household goods retailing (0.7%) and Clothing, footwear and personal accessory retailing (1.2%). Turnover fell in Cafes, restaurants and takeaway food services (-0.3%).

Apparently it was surprisingly good news – the Australian dollar leapt enthusiastically on its release.

Now April is a weak spot on the retailing calendar every year, the original data was down 0.5% on a month-on-month basis, hence the seasonal adjustment. But another way to manage the seasonality is to look at the data in a longer term context – for example, consider a ‘CPI-adjusted month-on-same-month last year’ comparison:

Now April does look pretty good here – maybe it’s the start of a new uptrend? But a couple of things to note. One, we are being generous. We do not have the CPI data for the June quarter, so the original data is being deflated using last quarter’s CPI. In other words, we have assumed there has been no inflation. If inflation is running at the same rate as last quarter, then in fact there will be no real increase in retail sales at all. And two, even on the assumption that there has been no inflation, retail sales are running at a rate well below historical trend.  The best we can hope for is that this month’s retail sales are an indication of better things to come.

Well, this is where you better drop me off – cause as we have argued previously – the Australian consumer just doesn’t have the credit limit to propel retail sales to their previous trend growth rate. Consider, CPI adjusted sales on a rolling 12 month basis (to once again strip out the seasonality).

In short, the retail sector remains under siege. At some point, retail sales must start growing again in real terms, if only because our population is still rising. But it doesn’t look like we have reached that point just yet. One suspects that the relief that greeted today’s headline will prove short lived.

While the commodity boom may have benefited the few that work in the industry, the balance of the Australian economy has been struggling along with tightening credit and rising consumer prices. With leverage in the suburban margins of our cities at budget stretching levels already, it is not surprising to see that retail sales continue to contract in real terms (here).

This softness is being mirrored in building approval data that is looking somewhat reminiscent of the GFC trough (here).

The rolling over in building approvals looks to have some ways to go – with the annualised run-rate for March up around ~167,500. As discussed previously, we don’t subscribe to the view that there is some ‘shortage’ in supply. Without additional government support (will the government really be able to restart the kiln with even more first home buyer handouts?), the housing construction industry is in for some lean times.

One final chart, the misery index remains at levels that signify a satisfying shortage in misery – at least in historical terms. But with the Fed intent on ultimately restoking wage inflation (how else will we pay off the debt?), I’m expecting that this particular metric will gain in prominence as it climbs back up the hill.

So while new motor vehicle sales have recovered the magic million mark (from the ABS here):

The trend is sales volumes has turned decidely southward:

Perhaps more poignant for the state of the consumer is the renewed downtrend in retail sales (from the ABS here):

Retail sales are under seige.

1) The Australian consumer has woken to the benefits of online shopping. And while the government might be tempted to fall in behind the persuasive bulk of our major retailers, the sheer magnitude of the efficiency gains offered through the internet mean that the consumer has a good chance of winning this battle. In any event, it is likely to cost more to enforce a widening of GST payable on online sales than it would generate in tax revenue. (Note that the ABS Retail Sales data is based on a survey of 500 large businesses and 2750 smaller businesses – that pay tax in Australia. I’ve asked the ABS how they are going in trying to capture online sales growth – it’ll be interesting to see what they say.)

2) And that is before the deleveraging of the Australian consumer has really begun. Note the growth rate of household debt remains in excess of the inflation rate and most paypackets with average weekly earnings rising 4.7% (ABS trend estimate) in the year to August 2010:

So the cards are really stacked against the retail sector. My guess is that we have already entered a new era in retail sales growth. At best we might match 1.5% p.a. growth rate of the early 80′s over the next decade. Even more likely, a repeat of the early 90′s no growth scenario can be expected for the next year of two.

Conclusion – While valuations have improved in the retailers of late, the dual headwinds of the overleveraged consumer and emergence of online shopping suggest that patience and shot selection will be rewarded for investors in the sector. Likewise, the once impregnable shopping centre property trusts are likely to struggle. Westfield’s recent restructure is as good a sign as any that even the big end of town are worried about these trends – the head trust is certainly more attractive with a reduced weighting to Australian assets but there is no need to jump early on this one.

The ‘low growth’ period spanned the inflationary boom of the late 80′s and the property bust of the early 90′s.  Since then, it’s been a case of sit back and enjoy the ever improving view. Even the GFC was a mere blip on the upward trajectory. But looking at the month-on-month annual growth rates, it’s not hard to see that we could be ready for another bout of lower growth.

Our terms of trade may be grand, the trickle down effect from the commodity industry might be alive and well, and immigration growth may (arguably) remain at 2.5%p.a., but it’s not that hard to imagine that we could be spending a lot more time bouncing around the 0% latitude over the next couple of years.  (Data from ABS here)

Turning to New Motor Vehicle Sales, we only have data back to 1994 – and perhaps not surprising the trend growth rate has been ~3.0% per annum.

The government kick started the recovery in sales with its tax breaks last year and continues to help out with its ‘not-cash-for-clunkers’ scheme.  We had been expecting that sales would trade back to trend, but now that we are here the outlook isn’t so rosy. It’s easy to argue that the best of times are immediately behind the consumer spend sectors of the Australian economy.  (ABS New Motor Vehicle sales release here)

With the assistance of last year’s taxpayer funded handouts a hazy hangover memory, and the recent cold-light-of-day interest rate rises a near term reality, it’s to be expected that retail sales would be tailing off.  Goodness knows how the hell we are going to get back to the long term average of 2.5% per annum under our own steam.  Odds favour another a dip below the line – something akin to 1990 perhaps?

The retail sector is clearly lagging the feel-good story emanating from the real estate industry. In my view, the incremental increases in household debt will make it a lot harder for the retailers over the next few years – expect something more like the 80′s than the ‘put that on my credit card’ 90′s and early noughties.

This will lead to a contraction in valuation multiples for the sector – it will just take time.

CURRENT PRICES

• The trend estimate increased 0.4% in January 2010. This follows a 0.4% increase in December 2009 and a 0.4% increase in November 2009.
• The seasonally adjusted estimate increased 1.2% in January 2010. This follows a 0.9% decrease in December 2009 and a 1.5% increase in November 2009.
• In original terms, Australian turnover decreased 23.8% in January 2010. Australian turnover increased 2.0% in January 2010 compared with January 2009.
• In trend terms, all industry groups increased in January 2010. The largest increase was in Cafes, restaurants and takeaway food services (0.7%) followed by Department stores (0.4%), Clothing, footwear and personal accessory retailing (0.4%), Household good retailing (0.3%), Food retailing (0.3%) and Other Retailing (0.3%).

That’s a pretty important heading that “Current Prices” because if you strip out the effect of inflation, retail sales are showing signs of exhaustion:

Take the 12 month rolling average to smooth out seasonality, and then adjust for inflation, and it looks like retail sales have stalled. All-in-all must have been a pretty difficult decision for the RBA today.  My guess is that it was the resilience of house prices that pushed them – cause as Ric Battelino said in December (click here to read the full speech):

As you know, the cash rate is currently 3.75 per cent. This is still 50 basis points below the previous cyclical low of 4.25 per cent in 2001. On the surface this might suggest that the cash rate is still unusually low. However, with other interest rates in the economy having risen by at least 100 basis points relative to the cash rate over the past couple of years, they are now above their previous cyclical lows.

Another way to think about this is that the current level of deposit rates, housing loan rates and business loan rates would have been consistent, before the crisis, with a cash rate of at least 4.75 per cent.

Taking these considerations into account, it would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range.

Enough data for one day.  As Radio Birdman opined, “I’m going down…into a data maelstrom” or something like that:

Gotta give Rob Younger credit for inventing the double microphone – it’s louder that way.

No wonder the big retailers were on the conservative side in the recent half yearly reporting (eg. see article by Malcolm Maiden) as department stores sales and household goods looked particularly soft – with our penchant for good food holding up the aggregate result.

I’ve overlaid in the chart above and the one that follows – a retail sales number for January 2010 that delivers the long-term-average-CPI-adjusted-monthly-growth-rate of 0.20%.  It requires a relatively optimistic 2% real growth in the retail sales as against those of January 2009.

The point being that, even given a reasonable January, the momentum in retail sales is all to the downside. The flipside to the government’s prodding of the Australian consumer into spending more and borrowing more is that there is less in the kitty…

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