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Poor economic data is bad news for Australia

Entrenched low wages growth and on-going softness in the labour market are fundamental reasons why the retail sector is struggling to grow.

This week has seen data showing wages growth plummeting to record lows and the pace of employment growth continues to muddle along, with a huge skewing to part-time jobs as full-time jobs languish. It also means that the unemployment rate remains closer to 6 per cent than 5 per cent.

It is not good news.

A basic economic principle is that it is hard for consumers to spend extra money if they are not getting much of a pay rise or worse, if they are unemployed.

Also read: Here's why the banks aren't passing on the full cash rate cut

On those measures, the average weekly earnings data, which measure the actual dollars and cents that go into people’s pay packets, rose just 2.1 per cent over the past year. At the same time, the economy has been stuck in the mud, with the unemployment rate remaining between 5.6 and 6.3 per cent for the last three years.

As a result, it is not surprising at all so see that over the past 7 months, retail sales have risen by a paltry 1.2 per cent or an average of less than 0.2 per cent a month.

The bottom line it that it is a tough gig to be in retailing right now. Consumers are holding back on their spending, despite record low interest rates which in normal times would flow through to a surge in retail activity.

Also read: Why is Australia's inflation rate so stunningly low?

For retailers, not only is there intense competition including from overseas retailers, but consumers are hurting not just from low wages growth, but they have dwindling savings and low interest rate returns on those savings.

The only notable positive aspect for consumers right now is for those with a mountain of debt who are enjoying significant savings each month because of record low interest rates. But even then, there is strong evidence that many mortgage holders are maintaining the dollar value of their repayments and reducing their loan balance, rather than spending the extra cash that the lower interest rate settings are giving them.

Looking at the issue of consumer demand from a different angle, in the present low wage environment, the only other sources of funds that can be accessed to underpin a lift in spending is limited to either calling on savings or turning to higher borrowings. Neither of these seem strong or sustainable sources of funds for a more positive tone for consumer demand.

Also read: The real reason home-ownership is so unachievable

The alternative, of course, and that is consumers continue to cool their heels and activity in the retail sector remains sluggish. This is most likely for the remainder of the year.

At a time when other parts of the economy are muddling along, weak consumer spending will ensure overall economic growth remains sub-trend. This is a scenario that risks putting further downward pressure on inflation as firms resort to discounting to keep market share which in turn means that the Reserve Bank is likely to deliver yet more interest rate cuts from an already record low base as it tries to get consumers – and businesses – to lift their spending.

Stephen Koukoulas is a Yahoo7 Finance expert with more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks, and as economic advisor to the Prime Minister of Australia.