Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 83

Animal spirits dormant except for coffee and food

The Reserve Bank Governor, Glenn Stevens, has drawn the line in the sand over the past six months, first by observing that entrepreneurial risk taking has been absent, then by imploring businesses to abandon their cost and capital discipline to embrace pro-growth strategies.

Analysts should therefore be looking for signs of a revival in the corporate sector's animal spirits as a guide to the date of lift-off in the Cash Rate. Regrettably, the recently released credit aggregates showed that business credit was flat in August and only 3% higher than a year earlier, confirming that the corporate sector remains reluctant to lift gearing against the backdrop of the new capital discipline.

The Governor's anxiety is understandable considering the imminent investment cliff in mining and energy over the next two years as the construction of LNG processing plants approach completion.

But does Mr Stevens seriously expect the non-mining sectors to ramp up their investment intentions at a time when they face persistent revenue headwinds? Unfortunately, the RBA continues to under-estimate the power of monetary policy to revive the corporate sector's animal spirits, to boost company revenues and lift expectations of growth in nominal GDP.

The ongoing weakness in consumer sentiment and the recently released August retail trade data suggest that the consumer's animal spirits also remain dormant. To put the retail trade survey in context, by excluding items such as services, petrol, motor vehicles and utilities, it accounts for less than one-third of total household sector spending.

Despite its narrowness, it represents an invaluable guide to consumer sentiment because it includes durable goods - such as PCs, washing machines etc - that households tend to buy when they are feeling optimistic and secure about their financial future.

I have further narrowed the survey to capture the three categories that listed discretionary retailers are most exposed to: household goods retailing; clothing, footwear & personal accessories; and department store sales. The chart below shows that discretionary spending across these three categories in aggregate has almost come to a standstill since the end of 2007 after growing at a strong compound annual rate of almost 7% in the preceding decade.

In contrast, the other components of the retail trade data - mainly spending on food as well as cafes & restaurants - has also slowed over the past seven years, but this has been more moderate. Clearly, discretionary retailers have been more exposed to revenue and competitive headwinds than consumer staples.

Persistently weak labour market conditions have not helped, with aggregate hours worked remaining stagnant for three years as companies continue to undertake restructuring and trim costs to offset anaemic revenue conditions.

Growth in all three components of discretionary spending have materially slowed since the financial crisis, but department store sales has remained the laggard (see chart below). In the past year, household goods retailing has lifted at a time when department store sales and spending on clothing, footwear & personal accessories has gone backwards.

The consumer's dormant animal spirits and intense retail competition (particularly from e-tailers) are reflected in the fact that sell-side analysts have not lifted their EPS projections for the discretionary retail sector for over four years now (see chart below). Indeed, the sector's forecast profitability is at the same level it was in 2005. This has been the lost decade for Australia's discretionary retailers. Valuations are not compelling at current levels, with the sector trading slightly above its historical median of 13 times twelve month forward earnings.

The consumer environment has deteriorated in recent years thanks to weak labour market conditions and increased job insecurity. This has been reflected in a decline in permanent incomes due to a lift in the discount rates that households apply to their future income stream. Little surprise that households have undertaken balance sheet repair and lifted their savings rate.

The revenue headwinds that have beset discretionary retailers are unlikely to change given intense competition from e-tailers and the RBA's timid approach to monetary policy. As with its attitude towards entrepreneurial risk taking, the RBA continues to under-estimate the ability for monetary policy to revive the consumer's animal spirits.

Discretionary retailers need to accept that a cautious consumer represents the new normal for now, and that trimming costs, lifting productivity and consolidating without undermining their service offering represents the most effective way to offer better returns to their long suffering shareholders.

 

Sam Ferraro is founder and principal of the independent financial consulting firm, Evidente.

 

  •   10 October 2014
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Global consumer and corporate resilience surprises everyone

After 30 years of investing, I prefer to skip this party

What will stop the market returning to its highs?

banner

Most viewed in recent weeks

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

The investment mistake killing your returns

Retail investors face an increasingly complex product environment, but simplicity may be the most overlooked advantage in building a portfolio you can actually live with.

Welcome to Firstlinks Edition 667 with weekend update

The downfall of the giant and three lessons for investors.

  • 18 June 2026

Latest Updates

SMSF strategies

Meg on SMSFs: How wide is the ban on LRBAs?

The government's recent deal with the Greens has put SMSF property borrowing on the chopping block. The change raises tricky questions about timing, exceptions and what SMSFs will still be able to buy.

Shares

Why Australian shares are falling behind the world

Australia’s market boasts a long record of outperformance, but recent results tell a different story. Is the ASX’s lagging performance a temporary setback or evidence that structural forces will keep global markets ahead?

Taxation

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

Shares

The next phase of Australian equity leadership

For years, banks have powered Australian sharemarket returns. But changing economic conditions, stretched valuations and global trends suggest the next generation of winners may not be found in familiar domestic sectors.

Economy

Global market growth hinges on Iran War and AI rollout

Global growth is facing mounting pressure from war, higher oil prices, inflation and trade tensions. But a wave of AI-related investment may prove powerful enough to support economic activity and reshape the outlook for markets.

Retirement

The retirees who can't spend

Why do so many retirees pass away with their wealth intact? Conventional wisdom blames pension rules for the reluctance to spend, but a case study from New Zealand shows that the answer may not be as predictable.

Investment strategies

Here’s my investment philosophy. What’s yours?

Investors often hear they need an “investment philosophy,” yet few know what that really means. Beneath the jargon sits a simple idea: a handful of core beliefs that shape every financial decision, for better or worse.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.