We expect consumers to remain conservative in 2020 continuing the low growth environment where retail sales growth tracks closer to GDP growth, with potential downside risks.
Retail sales have outpaced GDP and wage growth in recent years however the gap has narrowed. This means that consumers have spent at a greater rate than the relative growth of their disposable income, resulting in a steady reduction in household savings over the past 10 years from over 10% in 2009 to only 3% in 2019.
While this has been supported by the growth of debt availability and the ‘wealth effect’ linked to increases in residential housing values over this time, given the (now) low wage growth there is a limit as to how much consumers can and are willing to continue to erode their savings or access debt to support consumption.
While interest rate reductions have historically driven growth in retail sales by contributing to increased net disposable income, and the tax rebates for middle and low income earners should provide a “bump” to disposable income, there are a number of reports from various financial institutions and agencies which report individuals are channeling the surplus disposable income into reducing credit card debt and their mortgage, rather than consumption.
As shown in the chart below, in the year to October 2019 retail sales growth has been 2.2%, compared to 3.0% in 2018. This is despite three rate cuts in 2019. In fact, in the five months from June to October there have been three rate cuts announced and retail sales have grown by only 0.9%, whilst consumer confidence has reduce by c.6%.
The true impact is however potentially yet to be seen as Citi reports there has historically been a 3-10 month delay before the flow-on effects of interest rate cuts are observed in retail sales.
In addition, there is ongoing uncertainty in the global economic outlook impacted by the US/China trade wars, Eurozone performance and Brexit to name a few, which provide some downside risk.
This all means that we expect consumers will likely be conservative into 2020 despite recent stimulus announcements, which will contribute to an ongoing low growth environment where retail sales continue trend towards the rate of GDP growth.