The State of the Nation: Weak retail sales cast doubt on private consumption growth

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THE usual year-end “peak” season for the retail sector turned out to be something even smaller than a mole hill. Retailers had harboured high hopes that sales in the fourth quarter of 2014 (4Q2014) would lend a final boost to lacklustre numbers but were left sorely disappointed by consumers’ lack of will to spend.

A recent report by Retail Group Malaysia shows that sales numbers for 4Q2014 contracted 0.8% compared with the 3.9% growth achieved a year ago. For the full year, retail sales grew 3.4%, the lowest since 2009, despite the presence of more brands in the market.

The weak 4Q2014 retail numbers are in spite of low fuel prices and come before the Goods and Services Tax (GST) takes effect on April 1, raising doubts about whether private consumption can be relied on to support domestic demand growth post-GST.

According to Bank Negara Malaysia, the country’s GDP is forecast to grow between 4.5% and 5.5% this year, driven in part by private consumption.   

Private consumption indicates the consumption of goods and services by households. Surprisingly, private consumption grew 7.8% year-on-year in 4Q2014, the highest in 2014, even as retail sales contracted. However, this figure appears to be the result of the purchase of one-off big-ticket items ahead of the implementation of GST.

“Indicatively, [this] consumption was made on purchases of big-ticket items instead of retail sales,” explains AmResearch senior economist Patricia Oh of the contradiction between weak retail sales and high private consumption growth.

Notably, private consumption growth has been gradually declining over the last few years. It was at 8.2% in 2012, 7.2% in 2013 and 7.1% in 2014. This year, Bank Negara projects private consumption growth of 6%.

Despite the school holidays, year-end sales and Christmas, consumers were not persuaded to buy new things. They did not use the savings from the lower fuel prices in December for consumption, nor did the imminent implementation of GST from April stimulate consumption. “They were holding back on their spending,” says the Retail Group Malaysia report.

It adds that heavy discounts by retailers to lure customers were unsuccessful in generating higher sales. Instead, most retailers suffered a decline in their profit margins.

The report also notes that most segments of the retail sector saw either slower growth or a contraction, with the exception of department stores cum supermarkets that grew 7.9% in 4Q2014.  

However, department stores alone saw a 5.7% decline in retail sales in the same period, while the fashion and fashion accessories subsector saw a contraction of 2.2%.

The supermarket and hypermarket subsector saw just 1% growth in 4Q2014. However, worst hit was the “other specialty stores” subsector that covers consumer items such optical products, second-hand goods, and health and fitness equipment. It recorded a 6.7% decline in retail sales for the same period.

CIMB Research economist Julia Goh forecasts private consumption growth of 4.5% for 2015 but nonetheless notes that consumer sentiment has been weak and that there is no pre-GST buying spree to be seen, contrary to what many retailers have been hoping for.

Factors that would normally encourage consumer spending, such as stable labour market conditions and sustainable income growth, seem to have failed to lift consumer sentiment. The Consumer Sentiment Index fell to 83 points in 4Q2014 from 98 points from the previous quarter. It was 100.1 points in 2Q2014.

To the surprise of many, the Retail Group Malaysia report also shows that retail sales performance in the first two months of 2015 came in below expectations.

The report says Malaysian consumers were confused by the different public service announcements on the prices of retail goods and services after March and “were hesitant to spend more despite lower petrol prices and electricity charges”.  

According to Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz, potential savings from lower fuel prices would amount to RM7.5 billion. Additionally, there are also the Bantuan Rakyat 1Malaysia, 1Malaysia RM100 cash assistance for students and book voucher schemes that are meant to channel a total of RM6 billion to selected  households. This brings the total additional savings and assistance to consumers in these households to RM13.5 billion in 2015.  

That said, how much of the savings from lower petrol prices will in fact translate into consumer consumption?

AmResearch’s Oh says the current low crude oil prices could lead to lower petrol prices in April compared with March. “To a certain extent, this would help offset some of the effect of price increases from GST,” she says.

However, RHB Research economist Peck Boon Soon says consumers may turn cautious with spending as pump prices are still volatile.

To illustrate, when the managed float system for petrol and diesel was first implemented on Dec 1 last year, the price of RON95 petrol was set at RM2.26 per litre. A month later, this was adjusted to RM1.91 per litre, and in February, it was again adjusted downwards to RM1.70 per litre before being raised to RM1.95 per litre in March.  

Peck also foresees consumers cutting back on big-ticket purchases for a period of time until after GST is implemented and expects more downside risk to consumer spending.

Nonetheless, weaker private consumption figures this year are within the expectations of economists. While a large number of goods have either been zero-rated or exempted from GST, economists believe the new tax regime will create a one-off inflationary pressure that will affect both consumers and businesses.

In a Maybank Investment Research report dated March 12, the research house expects domestic inflation to rise from the impact of lower crude oil prices. It also sees GST to be inflationary for being a broad-based tax “resulting in more goods and services being charged as compared with the outgoing sales tax and services tax”.

It goes on to say that while the government is keeping the prices of some items stable, such as electricity tariffs and cooking gas, “there are still prospects of hikes in others, like public transport fares (buses, taxis) and toll rates.”

Since Maybank’s report, the government has agreed on a substantial hike in taxi fares, while putting the proposed fare hikes for express bus and rail services on hold.

Most economists project private consumption to grow below Bank Negara’s forecast of 6% this year. They foresee private consumption remaining weak for the better part of the year before picking up in the last quarter of 2015 when consumers adjust to the tax reforms.

Retail Group Malaysia concurs and expects consumers to resume spending “normally” by the last quarter of 2015. It projects retail sales growth of 6.9% for the last quarter of 2015 to achieve a full-year growth of 4.9%.

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This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.