Retail sector ‘entering period of increased risk’, economists warn
Business conditions remained resilient in July but confidence has been weighed down by weakness in the retail sector.
Key business measures including demand, profitability and employment all held steady at above average levels in July, according to the NAB Monthly Business Survey for July 2023.
Capacity utilisation also rebounded to be well above average at 84.5 per cent, according to the survey.
However, confidence and forward orders remained low, with both measures weighed down by “deeply negative readings in the retail sector”, said the major bank.
Overall, business conditions eased 1pt to +10 index points in July, while business confidence rose 2 points to +2 index points.
“Business conditions continued to show resilience in July and have been broadly steady in the past couple of months at above-average levels” said NAB chief economist Alan Oster.
“Business confidence also picked up in July to be back in positive territory as well, although confidence remains low.”
Mr Oster said the decline in forward orders had mainly been driven by very negative readings for forward orders in the retail sector, which been under pressure through recent months as spending on goods has declined.
“Still, current conditions in the retail sector remained above average in the July survey,” he said.
CreditorWatch chief economist Anneke Thompson noted that business confidence was weakest in the retail sector at -12 index points.
“The retail sector looks to be entering a period of increased business risk, and we are likely to hear more stories of insolvencies and business liquidations in the retail sector in the coming months,” said Ms Thompson.
“The continued price pressures coupled with anemic consumer confidence are weighing heavily on profitability, particularly in the household goods and department store sectors.”
Ms Thompson said both of these sectors are selling less product than they did the previous quarter, despite very strong population growth.
“For furniture, electrical, appliance retailers as well as residential construction wholesalers, conditions are very challenged, as consumers can quite easily tighten spending in these areas, and also did a lot of their household good spending during the lockdown periods. Low residential sales volumes and new dwelling completions also weigh heavily on these sectors,” she said.
Price and cost growth rise sharply
Labour cost growth rose to 3.7 per cent in quarterly equivalent terms up from 2.3 per cent in June, according to the survey. Purchase cost growth rose to 2.6 per cent, up from 2.2 per cent in June.
Final price growth reached 2 per cent, up from 1 per cent in June, with the retail component rising to 2.6 per cent, and recreation and personal services accelerating to 2.9 per cent, up from 1.2 per cent in June.
“Labour cost growth rose sharply in July, likely reflecting wage rises taking effect on July 1 including minimum and award wage changes,” said Mr Oster.
“Labour cost growth was strongest in recreation and personal services, transport and utilities, and retail, which aligns with where we would expect minimum and award wage workers to be most common.”
The rise in labour costs in July coincided with a pickup in the survey’s price growth measures.
“This suggests some of wage adjustments in the new financial year might have been passed through to prices immediately, said Mr Oster.
“However, when we look at the detail, the relationship between labour costs and prices is not simple and many firms that experienced a big rise in labour costs did not increase their prices.
“The reality is that firms’ pricing decisions are affected by many factors, including costs, the strength of demand, and the broader economic outlook. Nonetheless, the survey results highlight that upside pressures to inflation remain considerable, despite the improvement seen in the Q2 CPI release.”
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