Posts by "Paul Lorend"

Budget 17/18: ScoMo’s Gift to the Retail Sector

There’s plenty in the 2017 budget for the struggling retail sector to be happy about.

The retail industry met Scott Morrison’s 2017 budget with a shrug and a lingering pout.

Retailers weren’t expecting much, which explains the shrug, but they were also hoping for something, hence the pout. Employer group aficionado Russell Zimmerman mustered the term “mixed bag” to described the apparent malaise, which is essentially the lobbyist equivalent of ‘move on… nothing to see here’. Myer CEO Richard Umbers was slightly more pointed, declaring that there is little in the papers to bolster ailing consumer fundamentals.

Perhaps the most entertaining part of ScoMo’s toils for retailers were the Treasury estimates for the domestic economy, which likely led to several extended laughing fits in Boardrooms. After all the idea that spending would pick up amid continuing wage stagnation and historic levels of household debt is a herculean effort of economic gymnastics that only Treasury could stick.

Nevertheless, it’s hard to blame retailers for wanting a bone, especially after retail figures for March left analysts warning that the sector is on the verge of recession. To top it all off international brands – which have been the subject of much taxation related discussion- are biting into the pie at record rates. That’s to say nothing of Amazon, the impending arrival of which has sent investment banks and their analysts into a frenzy, with several downgrades this month moving share prices into an even steeper downward spiral than is the trend.

But while it’s true that the retail sob story has merit, complaining about how a 0.5 per cent Medicare levy and hand-balled bank tax will hit consumer hip pockets is the type of short sighted quarter-to-quarter earnings nonsense that’s been leading retail’s downhill charge. Citi analyst Craig Woolford’s numbers peg the average benefit of the budget to households at $55 by 2018-19, which is nothing to write home about. But what’s harder to model and ultimately of greatest possible impact to retailers is the sizeable fiscal cannon the government has aimed at the country.

Under new plans the federal government will spend $75 billion over the decade on large scale infrastructure projects, including the long awaited inland rail and western Sydney airport developments. Aside from just turning over the macroeconomic engine, these projects will provide retailers with new trade opportunities in the medium to long term, particularly for large format retailers who have found it difficult to secure floor space in inner-urban areas.

Compounding that are housing affordability measures and their likely effect on dwelling starts, a key metric for anyone selling something that goes in a home, as well as investment in Melbourne’s northeastern and Sydney’s western suburbs.

To his credit Zimmerman welcomed the measures, alongside plans to return the budget to surplus -ever the optimist- but Umbers’ subsequent assertion is an ostensible admission that he doesn’t believe in animal spirits.

It’s no secret that developed economies, including Australia, are currently falling prey to economic stagnation, and irrespective of whether you’re willing to attach the term secular, it’s fairly rich to turn around and partly blame the “subdued” economic environment for a sales slide while saying that tens of billions in fiscal stimulus won’t help.

Those maintaining hope that the RBA will pull economic growth out of thin-air, even as record low interest rates continue to battle against persistently low inflation, are pining for the days of full employment and mining sourced returns. Indeed, retailers seem to enjoy maintaining hope for days long passed, having been slow to adapt to rapidly changing consumers in the last decade they are now paying the price of disruption. But, aside from taking a good look at taxation reform, there’s not much the government can do about continually compressing retail margins.

Like it or not international retail is here to stay and the relatively healthy margins Australians have enjoyed from our previously isolated pacific island are long gone, never to return.

The best the government can do is to act in the interests of Australia’s long term economic prosperity, which is what this infrastructure focused budget is shooting for. Prosperous consumers make for prosperous retailers, but which brands will enjoy that success is overwhelmingly a question for the Boardroom – not parliament house.