Australia’s unemployment rate has defied the doom and gloom predictions, falling to 3.6% in May from 3.7% in the prior month. Around 61,700 jobs were added across the country, most of which were full-time roles. The number of employed in Australia reached 14 million for the first time, and the participation rate also increased to 66.9% (meaning more people were looking for work).
While the numbers were boosted by a small decrease in employment during the preceding Easter period (when employment fell more than it usually does), the numbers provide another indicator that the economy continues to “run hot.” This is backed by still-high levels of inflation, with the consumer price index (CPI) recording 6.8% in April, up from 6.3% in March. Higher rents, increased travel costs as consumers and businesses increase their travel plans in a restriction-free world, and a rise in petrol prices following the end of the reduced fuel excise levy were the primary factors. Yesterday did see a lower than expected inflation print coming in at 5.6% for the year to the end of May 2023.
For the first time, the Reserve Bank of Australia (RBA) has openly admitted that it wants to see the unemployment rate rise in order to curb inflationary pressures. The RBA’s deputy governor, Michele Bullock, drew some criticism for these comments–which some may view as ironic at a business event in Newcastle entitled “Achieving Full Employment.” It’s never easy seeing job losses, and they can have a severe impact on people’s financial, physical and mental health – an important point that American politician Nancy Pelosi put forth strongly when the Chair of the United States Federal Reserve testified about recent rate increases in the U.S.
It’s important to keep in mind, though, that inflation impacts everyone in society (to varying degrees), while the impact of job losses is more directed to those who become unemployed (typically 3-5% of the population during steep recessions). Inflation also has very real and detrimental effects, particularly those with lower incomes who are less likely to own financial and real assets (such as property, as can be seen with the current rental crisis).
We can see part of the impacts from inflation in the most recent consumer confidence data. The ANZ-Roy Morgan Consumer Confidence Index was released on June 14 and revealed that Consumer Confidence had fallen by 3.1 points over the prior week to 72.7–the lowest recording since April 2020 and among the lowest in the past decade. Consumer confidence has been extremely low for the past 15 weeks and has fallen 7.2 points in the last six weeks alone. The results saw higher confidence only in NSW, with declines in Queensland, Victoria, South Australia and Western Australia. The survey results followed the RBA’s increase to the overnight cash rate (OCR) by 0.25% to 4.1% just the week before, on June 6.
Data from the Westpac-Melbourne Institute Consumer Sentiment Survey (also released on June 14) showed similar results, with the index clocking in at 79.2. While this was a 0.2% increase from the prior reading, the recorded levels have been consistently amongst the lowest in the past 30 years–surpassing the Global Financial Crisis. Respondents ranked their most pressing concerns as inflation (62%), budget and taxation (43%), economic conditions (40%) and interest rates (28%). Interestingly, despite aggressive interest rate increases from the RBA over the past 12 months, mortgage costs do not appear to be the biggest concern–possibly because only one-third of households currently have a mortgage. Confidence around jobs declined significantly from the upbeat readings in prior surveys, with the unemployment expectations index increasing 21 points over the past 12 months.
Cost of Living Crushes Consumer Spending
Weak consumer sentiment is yet to impact housing prices, which have remained strong despite the rapid rise in interest rates. It has, however, hammered the retail sector.
Homewares retailer Adairs (ASX: ADH) saw its share price plummet 20% on June 2 following a trading update that showed conditions had deteriorated further since the end of last year, which management attributed to the cost of living pressures. The Adairs share price is now almost 54% lower since the end of January and 73% below its all-time high in April 2021, when the Company was benefiting from a pandemic-induced trading boom.
The share price of fast-food retailer Domino’s Pizza Enterprises (ASX: DMP) has also been under pressure, falling almost 10% on June 13 following a press release that included FY24 store openings below the medium-term outlook (of 8-10%), the closure of all 27 stores in Denmark, and a series of aggressive cost cutting initiatives. While management reiterated the long-term growth outlook for 7,100 stores by 2033, the share price remains 16% lower than 5 years ago and a staggering 73% below the all-time high in September 2021. Another boom-to-bust beneficiary of the pandemic.
Even discount retailers are struggling, with clothing chain Best & Less warning on June 20 that its same-store-sales fell 13.2% in the prior 5 weeks. Discount stores often benefit during challenging economic periods as consumers trade down from more expensive retailers, but the cost of living crisis appears to be hitting low income households particularly hard. Best & Less is a private company (so there’s no public share price information available), but the 250-store network is currently an acquisition target of billionaire retailer Brett Blundy.
Will the Pain Persist?
The strong jobs numbers and persistently high inflation have increased the risk of further interest rate rises in the coming months. Market prices now imply a 64% likelihood of a further 25 basis point (0.25%) bump by the RBA at next month’s meeting, which is up from 36% before the latest employment data release. Should interest rates continue to rise and inflation remain stubbornly high, retailers are likely to remain under pressure from the devastating combination of lower sales and higher costs. The only exceptions appear to be the big supermarkets, namely Coles and Woolworths, where sales have proven resilient and profit margins have expanded–bringing accusations from the media about profiteering from the pandemic and inflationary conditions at the expense of the Australian public.
Think Long Term
Retail is a fundamental part of a well-functioning economy. The main risk associated with investing in consumer discretionary stocks is that they tend to be cyclical in nature. The value of cyclical shares tends to rise and fall with the economic cycle — meaning they typically outperform the market in good times but underperform in bad times. For the contrarian investor with the fortitude to withstand short-term pain, there will be opportunities to invest in high-quality ASX retailers that could provide outstanding results in the long run.
Disclaimer: Tamim does not currently hold any of the companies named in the article
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.