retail

Australia's recession is weird and wacky but not our worst | Greg Jericho

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Employment at the end of last year was more promising than anyone expected when the virus first hit. Australia’s isolation from the rest of the world, which is often an economic negative, has in this case been a positive, as we have been much better able to quarantine ourselves from the pandemic. But while things are improved, we remain in a recession – even if it is a very odd one. And the latest retail figures for December show that we clearly remain in an abnormal situation.

In December the unemployment rate of 6.6% was nicely below the 7.5% peak reached in July last year. Even better, the underemployment rate had fallen from 13.8% in April to 8.5%.

That made for an underutilisation rate of 15.1%, which is the worst we have had since 1997, but at least is below the worst that was experienced during the 1990s recession.

Given the large increase in unemployment and underemployment over the past year, however, the labour market remains in recession.

US economist Claudia Sahm’s measure of recession, which compares the rate of unemployment with the lowest point of the past 12 months, shows that conditions remain as bad as they were at the peak of the GFC:

My own version of the measure, which looks at underemployment, suggests things are not as bad as they were at the peak of the GFC, but are still well in recession territory:

But what a weird recession!

The latest preliminary retail trade figures estimate that in December total retail trade was 9.4% above where it was a year before.

That is rather absurd – three times the median growth of retail trade over the past 15 years.

The monthly growth is even more silly – down 4.2% coming off the back of 7.1% growth in November. Normally retail trade goes up around 0.4%.

There are a few ways to work out when this pandemic era is over and our economy is back to normal, but one of the best might be to look at our spending patterns:

Right now things are wacky, both up and down every month.

When retail trade gets back to growing around 0.4% a month we can begin to think things are back where they usually are (regardless of whether that might be good or bad).

The retail figures, which were likely affected to a small extent by the northern beaches Sydney outbreak, also reveal just how big November has become as a shopping month.

Thanksgiving might have no meaning in Australia, but we sure as heck enjoy the “black Friday” sales that follow.

The other aspect is that despite the pandemic and the recession, we are spending much more on retail than would ever have been expected a year ago.

Even with the large fall in spending in December we spent $30.3bn in the shops – around 6% more than would have been expected going by the past five years:

Clearly the inability to spend on travel – especially overseas – has left households with a desire to spend elsewhere.

The big beneficiary of this has been household goods stores. This category includes furniture, electrical and electronic goods, and hardware.

And boy, have we spent money in those stores. Even with a 9% fall in December, we spent 15% more on such items than expected by the five-year trend:

All up we have spent over $8bn more on household goods since March than would have been expected.

One of the important aspects of retail trade is that it makes up a significant portion of all household spending (or “consumption”). It doesn’t include power bills etc, but there is a fairly good relationship between retail spending and household consumption – and this latter measure is what appears in the GDP figures:

Even last year amid the pandemic, this relationship remained relatively close and the big surge of retail and household consumption spending in September completely drove all the GDP growth in that quarter:

But the slower growth of retail in the December quarter suggests we should not see anything like the big September GDP growth of 3.3%, although it will likely still feature a lot of abnormalities.

And so, while retail spending in December was strong, it does not reflect anything like normal economic conditions. Households are shifting their spending from holidays and vacations to home renovations and improvements.

Overall, spending remains well above what we would expect, and at this point the big question is whether the introduction of the vaccine and lowering of travel restrictions will see a return to previous spending habits, or if this is the new normal.

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