What’s eating out got to do with the state of the economy?

After a strong year, last month’s retail trade figures showed turnover falling by 0.5% s.a. in May, perhaps to some extent impacted by the budget and a hit to consumer confidence.

Increasing household consumption, as has been the case in many developed countries, has been a key driver of economic growth for Australia over the long run:

retail turnover

And low interest rates have seen retail trade surge over the past year. But as noted, yesterday’s data showed a 0.5% m/m seasonally adjusted decline.

Although there is still the June data to come, it therefore looks quite likely that weakening retail and household consumption will subtract from GDP growth in Q2.

retail turnover

At times I probably come across as having rose-tinted glasses when it comes to the Aussie economy.

There’s a good reason for that – neatly encapsulated in the photo below – which I took on a Sunday in May. That is, I live in inner-city Sydney, where we have few such concerns locally.

No recession here! In fact, not only are we in the midst of a boom in total construction work done (+40% in only two years), retail has been going great guns over the past year too, and NSW turnover continued to lead the way, rising once again in May (+0.4% m/m, +7.3% y/y).

Over the forthcoming couple of years, New South Wales is in sound economic shape, as the annual retail turnover figures emphasise, while mining locations are still transitioning towards the production phase of the mining boom, necessitating low interest rates.

retail tunover growth by state

Indeed, New South Wales has been a very strong long-term performer in retail trade.

nsw retail turnover

That said, post-budget even NSW retail does appear to have been becalmed a little after a punchy annual lift in the year to March:

nsw retail turnover

Eating out

The one sector which continues to demonstrate extraordinary growth across Australia is retail trade turnover for cafés, restaurants and takeaways.

 Australia

While people seem to have a tendency to believe that household budgets are unusually tight today, this overlooks that nationally wages growth over time has outperformed CPI across all income levels.

Ultimately, spending patterns have been and are shifting, as I looked at in a little more detail here. All of which means that for those who want to get ahead in investment and their personal finances, it’s important to buck the trend towards increasing discretionary expenditure in line with income growth.

In Australia as a nation we have more disposable income than previous generations, and this continues to be reflected in the monstrous increase is discretionary spend for eating out:

cafes restaurants

Zooming in the chart shows that low interest rates have kept this trend intact over recent years too, showing that household budgets in aggregate are clearly not “stretched” in the manner claimed, rather they have different priorities, which include a far greater inclination to travel and muchos eating out:

cafes restaurants 2

Summing up…

-slowing retail in South Australia, Queensland and Western Australia (at least, until net exports take over and the economy eventually rebalances away from mining construction), and possibly Victoria;

-New South Wales economy continues to look in very good nick;

-the economy may struggle to record much (any?) growth in Q2;

-interest rates likely to be on hold for a long time to come.



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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