Grim trading in store as shoppers feel strain

RETAILERS are facing the worst economic outlook in 15 years, due to a potent mix of soaring inflation, higher borrowing costs and strains on household budgets.

Plunging consumer confidence is also threatening to trigger a string of profit warnings across the sector.

And while some consumers might have stashed away money for a rainy day during the Covid-19 lockdowns, that reservoir of savings – estimated to be as high as $450bn – could be quickly soaked up by higher living costs.

Barrenjoey analyst Tom Kierath says some of the most challenging economic conditions fore more than a decade will weigh on retailer earnings.

“Our analysis shows that the cost of living – housing/ loan interest, rent, petrol prices, energy, insurance and food – which accounts for $45,000 per household will rise 13 per cent in 2023,” Mr Kierath said.

He said some of the most challenging economic conditions for more than a decade would weigh on retailer earn

ings. “Consumers face a cocktail of higher costs ... which is not being offset by higher wage growth, while asset prices (equity and real estate) are falling,” he said.

“Government stimulus is set to be wound back too. It’s easy to see why consumer confidence is back to GFC levels. Increasingly, we think 2023 will be as difficult as 2019, potentially worse in some categories – suggesting consensus forecasts are too optimistic.”

Barrenjoey has cut its earnings per share outlook for JB Hi-Fi in 2023 by 9.3 per cent, Harvey Norman by 16.9 per cent and Wesfarmers by 4.2 per cent. It expects Kogan.com’s pre-tax earnings next financial year to fall by as much as 42 per cent.

“Our industry discussions indicate that trading slowed in late May,” Mr Kierath said.

“Cost of living pressures are set to bite hard such that spend on discretionary retail will slow, especially in the electrical/furniture categories where spending is most above trend.”

This “overspend” on discretionary goods – from flatscreen TVs and furniture to kitchen appliances and clothing – is also highlighted by a Macquarie report.

“We have become increasingly concerned with the economic outlook for Australia and the impact that rising inflation and interest rate hikes are likely to have on discretionary spending,” warns the incendiary Macquarie report.

“From a top-down perspective, consumers appear to be in a strong position to continue to spend.

“However, it is not just an ability to spend that is important. Consumers also need to be willing to spend, and that willingness to spend appears to be quickly contracting.”