David Jones – the retailer to Australia’s wealthy women and their daughters – has become a lightning rod for the debate over the prospects for the country’s economy.
This is, in part, because it is a class act – resistant to a downturn and highly sensitive to any upturn. Attunement to its customers’ demands is at the heart of its business. Every single one of its store assistants, for example, is “mystery shopped.” The resulting ratings are a key performance measure for all staff and are written into their employment contracts. David Jones is one of the few retailers that have significant leverage over the major shopping mall owners because it is a destination, even for those who can not afford to shop there.
But I digress.
David Jones last week upgraded its forecast full-year net earnings for this year from $A138 million to around $A150 million and from around $A146 to $A159 next. The reasons? Better-than expected sales in the May to June quarter, tight control on costs and cooler weather driving a rise clothing sales. From this point on, the explanation, potentially even for David Jones, is supposition.
The pessimistic view is that the upgrade simply reflects the massive fiscal and monetary stimulus that has underpinned the Australian economy since the start of the year. And, more to the point, that the effects of these measures will wane as the year draws on. If only to refresh one’s memory, the measures include: tax cuts this year amounting to $A7.1 billion; stimulus measures amounting $A8.8 billion from December of last year and a further $A12.7 billion from April this year; a cut in the official cash rate from 7.25% last year to 3% now, which although not fully passed through to consumers and business still has left, for example, the five year Aussie swap rate at a level last seen in 2003.
They (the pessimists) also draw support from the view that David Jones is explicit that next year’s profit figures are premised on exactly the same assumptions about same store sales growth, namely that it will remain flat to slightly negative. Such an assumption hardly suggests a cyclical upswing in the economy.
Unemployment continues to rise, albeit at a slower than expected rate, and is now set to reach as high as 8.25% in the middle of next year, according to Macquarie forecasts. Moreover, Australian household disposable income has enjoyed an unprecedented boom, averaging a compound 6.9% since 2002. Such a trend may be unsustainable
Finally, and anecdotally at least, the mood in Australian retailing also appears to be as dour as David Jones. The industry believes retailers will struggle to repeat the performance of the last quarter in the absence of the more than $20 billion of government handouts.
The contrary view is Australia is through the worst.
Australian retailer reticence, perhaps the most compelling piece of anecdotal evidence in favour of a gloomy outlook, may simply be symptomatic of the pessimism that has rewarded its proponents over the past 18 months. All recoveries are aptly described as an ascent of a wall of worry.
Australia’s economy is highly geared to the still-fast-growing Asian hemisphere. Even if commodity prices are lower, Australia’s mines, the principal source of export earnings, are still among the lowest-cost producers in the world and are better placed than most to weather the downturn. Production will continue and as a result work on maintaining the pipeline to market, one of the key drivers of the domestic economy, will remain in place.
The fiscal stimulus is also continuing. On top of the tax cuts announced this year there is another $A9.79 billion to come next year and these measures represent extra cash flowing into the pockets of homes and businesses each year in perpetuity. Federal subsidies for buyers of new houses, worth $A21,000 and a doubling of grants for first time buyers of existing homes to $A14,000 remain in force, while the Rudd government is also slashing stamp duty on houses worth less than $600,000 remain in force.
Housing finance approvals are a leading indicator on construction activity and are surging, running at an annual growth rate of more than 20%, after showing a 20% year-on-year contraction at the start of the year. In spite of the incentives for housing, people do not embark on buying a house if they are not confident about their employment prospects.
House prices, meanwhile, appear to have troughed and rental vacancies are at historical lows, particularly in Sydney, Darwin and Melbourne. Population growth is running at its highest level in four decades, underpinning the housing demand.
These are not immaterial forces and they may add up to something more than Australian mothers and their daughters having a spend-up at the Australian taxpayers’ expense. Time will tell, but David Jones’ contribution to the debate is that it casts the protagonists into sharp relief.

Richard Inder is an investment adviser at Macquarie Private Wealth. His disclosure statement is free and is available on request. Clients may hold shares in the firms mentioned. Comments, think differently? Write to richard.inder@macquarie.com