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How the economic climate will impact retail in 2016

globe, money, trade2015 marked another year of economic transition, as mining investment fell significantly on the back of a slowing Chinese economy, offset by domestic consumption growth and a strong property market. The effects of these developments on the retail sector have been mixed.

Here are five forces which will shape the industry this year:

1. Unemployment and population growth
The labour market is in better shape than was previously predicted and unemployment is expected to remain steady or decline over the coming 18 months. This means more dollars in pockets for consumers, and combined with a declining household savings ratio, more sales for retailers. Population growth, however, has been revised down as recent economic trends show declining net immigration. Notwithstanding, population growth is still forecast at around 1.25 per cent annually.

2. The Chinese economy
All this uncertainty around the outlook for China’s growth is putting a damp blanket on business investment. China construction activity, the main driver of our resource exports, is weak and appears likely to remain so for some time.

3. Government policy
The recent Bazel III reforms have restricted lending by our banks, as capital adequacy ratios remain in sharp focus. However, the government is looking abroad for opportunities to stimulate growth, as Australia’s involvement in the Trans Pacific Partnership could open the door for exporters to what is currently a $226 billion (and growing) market.

The federal government also recently concluded Free Trade Agreements with China, Japan and Korea, as well as the somewhat controversial Trans-Pacific Partnership Agreement. As these countries already make up our major export markets, it is hoped the FTAs will only serve to enhance the opportunity for Australian retailers to compete globally.

4. Housing & inflation
Household wealth is on the rise as record low interest rates and rising housing prices continue to support dwelling investment. The reduction in household savings suggests consumers might be more willing to take on debt than in the recent past and could boost consumption in the coming year.

5. Exchange rates
The continued depreciation of the AUD has been both a blessing and a curse. The rising cost of imports has hit retail margins, but has also boosted domestic online sales as international products have become relatively more expensive for consumers. Exchange rates have stabilised over the last couple of months and are expected to trend at around $0.74 for the year ahead.

This article was first published in the 2016 Australian Retail Outlook. Published annually, the Australian Retail Outlook examines the future of the retail industry across all facets.

The 72-page 2016 Australian Retail Outlook can be purchased in digital or print form here

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