Global Markets Research Update 6 March 2017 Michael Workman Senior Economist T. +612 9118 1019 E. [email protected] Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and at www.research.commbank.com.au. This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. Retail Trade – January 2017  Retail trade rose by 0.4% in January, to be a modest 3.1% higher over the past year and below the decade average of 4.3%.  Consumer spending growth is constrained by weak wages growth and the predominance of part over full-time jobs growth.  By State, the strongest annual growth in retail spending growth is in South Australia (4.5%) and Victoria (3.8%). Today’s 0.4% rise in retail trade for January was spot on the market consensus (CBA (f) 0.3%). Annual growth is a modest 3.1%. Firmer annual growth needs stronger jobs growth which may not occur till next year. The 0.4% rise was driven by the large 1.4% rise in household goods sales which includes furniture, electrical goods, hardware items and household and lifestyle goods. Electrical goods sales rose by 2.4% in January. Our guess is that air conditioner and fan sales had a big month during the NSW heat wave. Household goods account for around 18% of monthly retail trade of $25.7bn. Across the categories, food sales rose by 0.2%, cafes 1.1% and other 0.1%. Sales fell in department stores, down 0.5% and clothing, -0.4%. Annual growth is positive for food, up 3.5%, clothing 5.3%, household goods 1.7%, cafes 5.9% and other 2.7%. Department stores sales are down 3.6% over the year. Across the States it is all positive annual growth, with SA up 4.5%, Vic 3.8%, Tasmania 3.5%, NSW 3.2%, Queensland 2.8% and WA 1.2%. WA’s problems stem from a weak labour market lifting job insecurity and eroding consumer confidence. Confidence, retail and tourism The link between consumer confidence and retail spending is not strong. Confidence has been around its decade average levels for the past year. But nominal retail spending is growing by only a modest 3.1%pa. Retail conditions are very competitive and consumers are “sales-driven”, leading to continuous discounting. Volume rises over the past year occurred in most categories, except food and department stores, but against a background of discounting and price deflation. The household savings ratio slipped to just 5.2% in the December quarter, indicating that consumers are parting with some of their savings. But services related spending has a rising share of total household spending, at 69%, compared to retail’s 31%. Tourism (international and domestic) dollars are a major positive influence on retail activity in the major cities. Anecdotes suggest tourism accounts for 5% to 7% of retail turnovers. And not just food and accommodation, but also high-end clothing and accessories. International events, like tennis and Grand Prix cars, help lift retail sales. But they also attract foreign retailers. China’s 1.2 million tourists over the past year, up 16%pa, spend more per capita than others. More hotels and bigger airports are needed to capture all the dollars from the tourism boom that will help lift retail sales growth. -2 0 2 4 6 8 -1.0 0.0 1.0 2.0 3.0 4.0 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 RETAIL TRADE (% change) %% Annual (rhs) Monthly (lhs) 10yr avge (rhs) -3 0 3 6 9 12 -3 0 3 6 9 12 Jan-12 Jan-14 Jan-16 % % SA RETAIL TRADE (trend, annual % change) WA NSW VIC QLD -4 0 4 8 12 16 -4 0 4 8 12 16 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Services Goods RETAIL TRADE (annual % change)% % Total Goods are 86% of retail, services 14%