What do sales of six-seat modular sofas and matching buffet tables tell us about the financial health of households and the broader economy? Quite a lot, it turns out. And, according to market professionals, it does not look good.
Annual profit at Sydney-headquartered furniture retailer Nick Scali fell almost 20%, according to results released on Friday. Crucially, sales order growth for the past two months has turned negative, down 1.2% from the prior year.
The results came a day after department store Myer disclosed that its profits and sales were down as a result of weaker spending and a decision by the department store operator to discount its fashion brands.
Richard Hemming, editor at Under The Radar Report, said the pullback at Nick Scali did not bode well for similar retailers.
“Nick Scali is a premium product, so if they’re doing it tough, others will be doing it tougher,” said Hemming.
“The point of interest rate rises is to crush inflation expectations, and they seem to have done that, so job done. The question is whether or not there are residual effects.”
The global recession concerns of recent years have been tied to a fear that cost-of-living pressures will eventually depress spending to such an extent that economies will shift into reverse.
Australian households have grappled with a rapid-fire 13 interest rate hikes and high rents, as well as rising costs for essential items like electricity and food. This has left less room to buy discretionary items – like oak with herringbone pattern dining tables.
The question now turns to whether the same consumers who powered Australia out of the pandemic lull will now push the country into recession, or if there will be a more modest rebalancing of the economy.
In the US, recession fears have started to take hold, triggering huge volatility in global share markets. US furniture seller Wayfair disclosed ominous results earlier this month after reporting a peak-to-trough correction in spending levels last seen during the global financial crisis.
In a forthright assessment, Wayfair’s chief executive, Niraj Shah, told investors there were three clear factors behind the correction: the malaise in the housing market; overspending in the early pandemic and a slowing economy.
In separate financial results, entertainment company Walt Disney warned of a “moderation in demand” for its theme parks as consumers shifted their expenditure to essential items, including housing. Meanwhile, shares of the San Francisco-based Airbnb fell more than 13% in one session after the homestay company warned it was “seeing shorter booking lead times globally and some signs of slowing demand from US guests”.
While many big name American companies have just disclosed their earnings, Australia’s reporting season is just heating up, with well known consumer names JB Hi-Fi and Breville among those due to report in the coming days with further insight into household spending.
AMP’s chief economist, Shane Oliver, said the signs of a pullback in consumer spending were expected. “The basic message here is that consumers in both countries are struggling,” Oliver said, referring to the US and Australia.
“US consumers are a little bit stronger than Australians, because Americans haven’t seen the mortgage rate increases that we’ve seen here.
“Debt servicing costs in Australia are now taking up a record portion of household income, and that’s not the case in the US.”
While interest rates have risen in the US, most mortgage holders have long-term fixed rates and are therefore not subject to variable changes. At 4.3%, the US unemployment rate has edged higher than Australia’s, although its jobs data gets reported earlier.
Oliver puts the risk of recession in the US and Australia at about 50%.
“There’s a risk that if the US goes, then Australia could be dragged into it this time around,” he said.
