Relations between the federal government and business are as bad as they’ve been for 40 years, and it’s not just because of the proposed carbon tax.
It’s because the biggest problem is not even being discussed, let alone dealt with, not that there’s a lot the government can do about it anyway: the nation’s biggest employer — retailing — has been quietly struck down by Dutch disease because of online shopping.
Retailing is the bedrock of the economy, employing about 1.3 million people directly and touching millions of other lives through wholesaling, transport, manufacturing and farming.
The central paradox of the Australian economy is that even though national income is booming because of the commodities boom, retailing is close to, or in, recession. Retailing is only supposed to benefit from rising income.
It is the key reason, in my view, why the Gillard government is making such heavy weather of the carbon tax, why business and consumer confidence is so soft despite very low unemployment, and why business people generally are more at odds with the government than at any time since the Whitlam years.
Dutch disease is only meant to affect manufacturing and tourism. It happens when a nation’s currency rises as a result of a terms-of-trade boom that is caused by rising prices for one or more commodities — hurting other exporters.
The term Dutch disease was apparently coined in 1977 by The Economist to describe what happened to the manufacturing sector of The Netherlands after the discovery of a large natural gas field in 1959.
In the classic economic modelling subsequently developed in the 1980s, the non-traded goods sectors such as services and retailing remain unaffected while in the traded goods sectors of the economy there are wildly different experiences.
The parts that are experiencing a price boom — in our case iron ore, coal and gold — do very well even though the currency rises, while manufacturing, tourism and agriculture suffer.
However, there has been a dramatic change to this scenario in the modern era: retailing has been moved into the traded goods part of the economy by the internet.
Everywhere I go people talk about the amount of shopping they are now doing online. It’s not because it’s necessarily more convenient; in fact, you usually have to wait for the product, you can’t try it on and you can’t get to know the shopkeeper.
It’s because the stuff is so cheap thanks to the high Australian dollar. More and more people I bump into speak in wonderment about the deals they are getting from overseas websites. Products, especially clothes, are less than half the price in Australian shops, it takes just few days to get here and usually includes free postage.
We’ve already seen this phenomenon devastate the bookshops with the closure of Borders and Angus & Robertson; now it’s moving to clothing and footwear and a wide range of other products.
The supermarkets are still doing OK because food shopping has not yet moved online in a big way, but the clothing retailers are suffering from this new form of Dutch disease in a big way.
The rag trade in Australia touches millions of lives and right now the traffic in their shops is rather mysteriously thinning out, or else those who come in are trying on clothes that they go home and buy online for half the price.
The woes of retailers caused by the rise of online are being added to by the increase in the savings rate, as Australians look to repair their balance sheets after the borrowing binge of 2002 to 2007.
Is there anything that can be done about all this? Not much. The Australian dollar will probably stay high for a long time, and word of mouth will ensure that online shopping continues to grow and silently kills the local retailing industry.
This is a big part of the reason why business generally is so antagonistic towards the carbon tax: retailing has suddenly become an unrecognised trade-exposed industry and its influence pervades everything.
*This first appeared on Business Spectator.
A price difference of 50% can’t be ‘blamed’ entirely on a high dollar. Not least because the higher dollar cuts the cost of goods to the retailer. At least some ‘blame’ must lie with the different cost structure between providing ‘bricks’ vs ‘clicks’.
While it’s true that the strong dollar and cheaper prices overseas are driving many to shop on-line, I think you’ve overlooked a number of other factors that are contributing to a softness in the retail sector. Many which are probably just as, if not more, significant.
Firstly, there is an air of lingering caution post-GFC, further fuelled by weakness in the Australian sharemarket and hysterical and negative reporting in the press of billions being wiped off the market cap, whenever there’s a big down day.
Secondly, despite the inflation numbers that the Government’s trying to fob us off with, the cost of living has risen substantially, particularly for food, petrol and utilities. This has to have a flow on effect to what people have left for discretionary spending.
When you then factor in the fact that we know we’re being asked to pay well over the odds for so many things it’s little wonder that we have lost our appetite for retail therapy.
The failure of A&R and Borders has very little to do with competition from the Internet. It was a highly leverged buyout that couldn’t be floated due to the GFC and was carrying too much debt from the loans which funded the buyout to ever fund its own way.
Retailers, and especially distributors, have had it easy in Australia and have failed to pass on a large proportion of their decreasing costs from moving manufacturing to China. That had to come home to roost one day, and that day is now. Internet shopping is partly responsible for that, but so are the $2 shops and small importers.
The cost to retailers of their goods has fallen by 30% in the last six months. But they haven’t lowered their prices anywhere near as much and are facing a buyers’ strike as consumers wait them out. That’s not the fault of consumers.
This is the real legacy of the Internet. More devastating to retailers than the sale of goods is information about the market, something that even ten years ago the retailer and distributor knew but the consumer didn’t. Consumers nowdays have a fair idea of the costs of a product, and if they don’t then the Internet allows them to easily communicate with someone who does. There are endless forums where experts help newbies with making purchases — Whirlpool for ADSL, DTVforum for TVs and PVRs, bicycles.net.au, and so on. If you don’t stock good product then you are found out pretty quickly these days, unlike the old days when retailers would exploit the ignorance of consumers with fancy sales talk.
Distributors are the real issue here, much more so than retailers.
Most of these retailers are buying overseas themselves and as they buy bulk they get a better discount and bulk shipping discount soooo the real question you should be asking is why isn’t the businesses passing the lower prices from overseas.
The industries that cause Dutch Disease can usually afford to pay higher wages than the industries that suffer from it. Hence the obvious remedy is to make payroll tax and the superannuation guarantee progressive with respect to individual wages — as explained in the following letter, published in the AFR on June 20:
For more detail, see http://is.gd/ptprogress and http://is.gd/bc4super . (The lack of responses, for or against, makes me suspect that people just don’t get it.)