While fashion and economics might seem totally opposed from a consumer point of view, more astute spectators will see that fashion trends, much like business cycles, rise to an apex, then decline until other trends rise to take their place.
In the prevailing climate of economic uncertainty and volatility, it has been increasingly hard to determine which direction the trends are taking. Although the global financial crisis is yesterday’s news, European financial troubles continue the trend of dour headlines.
In line with the current economic climate, the reaction of saving and paying down debt seems like a rational response as a consumer. Australians are doing exactly that, with the national savings ratio at a two decade high of 9.2 per cent. However this does not bode particularly well for domestic retail, which faces the challenge of subdued consumption. This might seem worrisome on the surface, but a closer inspection of this issue reveals that an increased savings ratio at this point in time is actually a positive for businesses.
Increases in savings has enabled the shift from dependency on offshore funding, allowing banks to provide loans that are increasingly funded domestically. Benefits of this include a reduction in funding costs, making credit more widely and easily available. Perhaps more importantly is the benefit of insulating the domestic economy against the contagion of uncertainty from foreign economies. Suspicions that borrowers may default due to financial instability overseas can lead to a tightening of credit, essentially amplifying jitters into full-blown fear.
While fingers are pointed squarely at Europe, and to a lesser extent the United States, for current global economic woes, it is slightly harder to prescribe the lack of domestic consumption to Australia’s economic performance. Major indicators such as unemployment and wages growth point to a healthy economy. Unemployment stands at 5.3 per cent, lower than it was at the beginning of the decade. Also, household disposable income rose 4.1 per cent in the last financial year, markedly stronger than the 0.4 per cent achieved in the previous financial year.
Figure 1
Figure 2
Dissecting Australia’s household final consumption expenditure [Fig 2], the outlay by households for goods and services, shows a continuous rise since 1961. Even over the downturn in 2009, household final consumption expenditure failed to dip into negative territory. Instead, negligibly increasing by 0.2 per cent.
In the ever-growing consumption of households, the proportion spent on clothing and footwear looks to have reached equilibrium (at least in the interim) at about 3.5 per cent of total household expenditure, where it has remained in the band for the last 17 years. Hence, the fashion industry has received about the same share of our pay packets for almost two decades. Earlier in the decade there was a slight divergence from the band as spending increased faster on other items, but the global financial crisis has seen a return to similar levels.
Over the long-term, the trend does indicate that spending on clothing and footwear has gradually declined over the past 50 years. Competition for consumer dollars has increased with the popularity of consumer electronics and service industries. In an age where consumers are time-sensitive, retail food outlets have taken prominence over home cooked meals. At the same time, consumer electronics have risen to a level where smartphones are as much a fashion accessory as they are a communication device.
So while technology will continue to alter the way we live our lives, for instance the ability to telecommute from home, these long-term structural changes are unlikely to have any bearing on spending on apparel in the coming year. In 2012 we’ll see more of what we did this year. Online shopping, although growing, will hardly hollow out domestic retail industries, but will change the buying and browsing routines of customers. The ease of price comparison and online reviews will lead to more discerning shoppers who are aware of trends and bargains even on different continents.
In any economic commentary related to Australia these days, it is hard not to mention China. Emerging economies such as Brazil, India and China are, and will continue to be, the centres of economic growth. With the shift of focus from West to East, China and the rest of Asia should not only be considered as a point of apparel manufacturing but also a potential point of purchase. Population sizes in these countries alone are enough to command the attention of business stakeholders, but even more significant is the transition of their populous to middle incomes and urban centres. As luxury gives way to frugality on our shores, the dichotomy of emerging economies is not only the relatively low labour costs but the emerging strata of nouveau riche, much younger than their wealthy predecessors. Their appetite for luxury goods abides by social frameworks laid out for them by affluent economies. Consumption is still very much in vogue in emerging economies as a signal of social status and achievement.
The Australian dollar, which is projected to sit comfortably near parity with the US dollar for the year ahead, will continue to influence the transactional relationships between Australia and emerging economies. For anyone involved in the domestic manufacturing of apparel, the downsides are glaring. Lower material input costs in Australia will be challenged by cheaper labour, and in turn more competitive final products manufactured abroad. But in the larger scope of the supply chain, a stable economy and strong domestic currency can work to benefit the fashion industry and especially retailers.
The liberal approach to tariffs in the fashion industry has served its purpose in ensuring a progressive system that is ready to take on the hurdles that come with globalisation; as opposed to a quick demise when protectionist industries are met with international competition. Comparative advantage does not come easy; the pay-off is for risk takers who are able to leverage Australia’s economic strength against emerging markets. The last wave saw Australian surfwear brands successfully establish themselves on the world stage and there is no better time than the coming year for similar enterprises to embrace global challenges.
The demanding environment especially for retailers is expected to continue throughout 2012, but there is undoubtedly light at the end of the tunnel. Unemployment is low, household incomes are higher and consumer sentiment is positive, indicating that conditions will improve over the next 12 months. Added to this, the RBA cut interest rates on Melbourne Cup Day and is likely to cut rates again next year, supporting higher spending by consumers. However, global economic uncertainty and more selective and savvy shoppers means that retailers still need to work hard to attract customers through their doors and even harder to open their wallets. IBISWorld estimates that from 2012-13 clothing and footwear retailers can expect increased sales; however growth will be at a timid rate.
