Can rising interest rates derail big-retail’s Indian summer?

While listed retailers are expected to benefit from Budget’ 22 cash handouts and cost-of-living relief, the benefits could be short-lived with Australian retailers preparing for steady value rises from their suppliers for the rest of the calendar year, and beyond.

Much of the expected intense price hikes are being attributed to geopolitical tensions, including Ukraine and supply chains effects from recent lockdowns in China.

Add the lingering impacts of the pandemic, rising inflation and low unemployment – forcing upward pressure on wages - and it’s clear that retailers are going to need all the help they can get.

Will higher costs rain on retail’s parade?

What’s increasingly evident is that after absorbing higher operating, freight and packaging costs over the past few years, retailers now have to pass on higher costs to consumers.

As a result, the $65,000 question is what impact that will have on spending, especially with more of the household budget going to cover mortgage costs.

Australian retail sales beat expectations in March, up 1.6 % (to $33.6bn a new record high), and triple what economists were expecting.

But in light of pressure on household budgets, courtesy of rising interest rates, the jury’s out on whether retail’s Indian summer will continue at the same click.

Meantime, retail sales are on a tear, up 9.4% on the last 12-months and much stronger compared to the pre-covid trend.

Pull back

AMP Investments' senior economist Diana Mousina expects to see a pull-back in retail sales growth. Admittedly, the $240bn war-chest in cash hoarded by consumers since the pandemic may offset tougher day for retailers.

But Mousina expects higher than normal goods demand to be replaced with higher services spending on the back of higher interest rates, and as consumers resume (pre-covid) activities.

It’s doesn’t take an economist to conclude that within a post-covid world, a return to normal buying patterns will benefit sectors beyond food staples, with tourism and travel-related services likely to divert spending away from retail segments.

Source: ABS

Calm before the storm

While March figures show discretionary segments continuing to outperform – with food staples up 0.5%, the standouts are cafes & restaurants up 2%, and non-food retail up 2.5% for the month on a combined basis.

Whether it’s the calm before the ‘interest rate’ storm remains to be seen, but big retail is continuing to grow. Department stores were up 4.1%, while household goods jumped 3.4%.

What could help to ease margin pressures experienced by big retailers with a heavy reliance on domestic revenue - that source goods in other currencies - is a rising Australian dollar, notably against the greenback (US$) now at US$0.72, and to a lesser extent Japanese and Chinese currencies.

UBS expects Wesfarmers (ASX: WES), Premier Investments (ASX: PMV), Temple and Webster (ASX: TPW), Adairs (ASX: ADH), apparel brand Universal Store (ASX: UNI),JB Hi-Fi Limited (ASX: JBH), Harvey Norman Holdings Ltd (ASX: HVN), and Kogan.com (ASX: KGN) to be amongst early beneficiaries.

Source: Trading Economics