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

2 billion reasons to fix retirement income

A proposal to address Australia's 'stranded balances' in retirement by requiring super funds to transition members to pension phase at 65, boosting retirement income and reframing super as a source of income.

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Do super funds need a massive wake up call?

UK retirement expert, Guy Opperman, believes super funds are failing at supporting members in deaccumulation. Here is what Australia should do about it. 

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

Reforming the taxation of wealth and wealth transfers

As the budget approaches debate continues about the need and method for addressing wealth inequality. Could reinstating wealth transfer taxes be the answer?

Latest Updates

Back to the future - Why indexing CGT is a good idea

A return to indexation of capital gains would be a fairer way to compensate households for the effects of inflation than the current discount. Importantly, it opens the door to future, broader reforms to stop the taxation of inflation.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Strategy

The folly of the Iran war

From oil shocks to fractured alliances, the Iran war carries the hallmarks of a historic policy misstep - one that could tip an already fragile global economy into crisis.

Taxation

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Investment strategies

The red metal's long game

Copper has had a rough few weeks but investors should not ignore the potential for future price increases as supply increasingly falls behind demand.

Taxation

The lesser-known effects of changed property taxes

The budget’s property tax reforms are being framed as fairness measures, but they risk splitting the housing market, penalising lower‑income investors and introducing distortions that may prove costly.

Latest from Morningstar

Why stocks sometimes fall for no obvious reason

The vast and opaque world of private assets is a powerful gravitational force - and when trouble hits, it's the more liquid public equities that often the feel it first.

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.