Macro Roundup - Taking the Temperature of Retail Trade

Coming months will show whether consumers in the Asia-Pacific region have faith in the economic recovery or have merely been spending their stimulus cheques. The key to solid retail sales is low unemployment and government stimulus measures. The region's labour markets are improving, but industrial production shows weakness.

Australian retail sales kept growing

The good news: Australian retail sales never contracted on an annual basis during the slowdown. The country managed to steer clear of recession, and the unemployment rate stopped climbing in June. Retail sales have been helped by government stimulus spending. Money was deposited into the bank account of every citizen who met income limits, and pensioners received extra cash transfers. Yet, even with these measures, nominal retail sales growth has slowed. Australians have in particular been spending less on clothes and soft goods.

New Zealanders have been spending less on retail goods than Australians have. The New Zealand economy grew only 0.1% q/q in the second quarter, and the labour market is under stress from a 6% unemployment rate. With well-developed welfare states and ample access to credit, consumers in Australia and New Zealand are able to smooth their consumption, resulting in a more modest slowdown in retail sales.
Consumers in export economies cut back

When their economies began weakening, consumers in Asia's most export-dependent countries were quick to scale back their spending. Retail sales hit bottom in February and have recovered remarkably, not unlike the recovery in exports. The recovery of retail sales in Hong Kong and Taiwan is noteworthy, since unemployment is still increasing in these two economies. In August, Hong Kong's unemployment rate was 5.8%, well above 2008's average of 3.4%. In Taiwan, August's rate was 6.1%, also above the 2008 average of 4.1%.

Consumer spending in Taiwan has been helped by shopping vouchers distributed in January. Most of the spending from these vouchers is estimated to have taken place early in the year, and more recent increases in retail sales have likely come from improved sentiment; consumer confidence has been improving since midyear. Higher retail sales in Hong Kong in August have been attributed to more tourism and higher asset prices, which support retail sales through the wealth effect.

South Korea's retail sales did not drop as low as those of the other major exporters in the region and have recovered swiftly. South Korea narrowly avoided recession, and its unemployment rate has eased since June. Japanese consumers spend conservatively even in good times, and Japan's retail sales have not dropped greatly, perhaps because consumers have access to high household savings and credit. Also, the Japanese government has made a huge effort to stimulate household spending through cheques and subsidies for energy-efficient cars and appliances.

Though Singapore's retail sales for August surprised on the upside, they were 5.2% lower than a year earlier. The city-state's consumers have been remarkably slow to respond to the upturn in the domestic economy. Second quarter GDP added 5.1% q/q, and the advance estimate for third quarter GDP growth is 3.5% q/q. The unemployment rate, though, is uncomfortably high. A shift toward durable goods—in particular motor vehicles—could mean Singaporeans are taking advantage of lower prices rather than feeling more confident.

Retail sales in Thailand weakened during August after recovering along with sales in other export-oriented economies. Political uncertainty and lower industrial production and exports kept shoppers away from the malls.
What happens when the stimulus runs out?

In coming months, the stimulatory effect of cash transfers, shopping vouchers and retail subsidies will run out. Taiwan's vouchers were valid until the end of September, and cash transfers in Japan and Australia were one-off measures. Japan's subsidies for environmentally friendly cars and appliances will continue into 2010.

Future retail sales figures will show whether consumers have faith in the economic recovery or whether they were merely spending their stimulus cheques. Improved labour markets are prerequisites for a sustainable recovery of the region's retail sales. Since employment appears to be improving in some economies, there is hope. But Asia's frugal shoppers are hard to persuade to spend.

Tine Olsen is an economist in the Sydney office of Moody's Economy.com. Tine covers Taiwan, Greece and Israel. She has worked for the International Monetary Fund, the Copenhagen Stock Exchange, and the Danish Ministry of Foreign Affairs. She holds a Ph.D. from Monash University and an MSc and a BSc from the University of Copenhagen.