Retail trade strong but maybe not for long

IT'S clear that growth in consumer spending has picked up, but there's a risk the surge may be short-lived.

The value of retail turnover rose by 1.2 per cent in January.

It meant an increase of 4.8 per cent over the six months to January - more than the rise over the preceding 21 months.

That's quite a turnaround.

The most appealing explanation is that the economy is recovering from its bout of below-trend growth, boosting consumer confidence.

It's appealing, but not necessarily correct.

Consumer confidence did rise in the latter months of 2013, thanks mainly to a buoyant mood among conservative voters in response to the coalition's federal election victory in September.

But it had begun to sink again by December.

By January it was well below what would reasonably be expected during normal, non-recessionary economic times, and it fell further in February.

And so it should.

Stagnating employment growth and, thanks to that, very slow growth in wages meant growth in household disposable income was unusually weak in 2013.

In the December quarter, that measure of income was only 3.9 per cent higher than a year before.

Average annual growth in the preceding decade was 7.1 per cent.

After adjusting for the change in consumer prices, the latest year's growth rate came in at just 1.1 per cent, versus the prior decade's average of 4.4 per cent.

There are two other explanations that should be considered seriously.

One is the rise in lending for housing, which can flow into consumer spending in a variety of ways.

Higher home prices can make homeowners more willing and able to borrow to fund more spending.

The buoyant market can funnel cash to sellers trading down to more modest homes, as often happens on retirement.

And it can boost demand for new housing, with all the employment and income effects that come with increase building activity.

Once the homes are built, they need to be furnished, decorated and maintained, so demand for household goods and services also rises.

But the increased retail spending may be in large part just the effect of rising prices as the lower Australian dollar percolates through the economy.

The price of the goods and services covered by the retail trade survey rose by 1.2 per cent in the December quarter, five times more than they had risen over the preceding year.

There are no monthly price estimates so just how much of rise recorded in January was down to price increases is anybody's guess.

But if the recent surge in the retail spending is the result of the exchange rate's fall and the pickup in the housing market, it may prove short-lived.

History suggests consumer spending will dip once housing goes off the boil, any exchange rate effects on prices will soon dissipate.

What retailing needs is a pickup in employment and wages.

Until that happens, any apparent strength should be seen as temporary.

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