Retailers, hospitality the first to hurt as rates rise

Small and medium businesses in the retail and hospitality sectors are already feeling the pain from recent interest rate rises and general gloom about the economic outlook, business groups say.

Retail figures released yesterday showing that sales in the retail and hospitality sectors stalled in January, with hospitality suffering a 0.4% fall, and just hours later the Reserve Bank of Australia lifted rates by 0.25%.

Yesterday’s poor results, says Restaurant and Catering Australia chief executive John Hart, illustrate the fact that spending in cafes and sandwich bars is often the first thing to go when consumers get nervous about the health of the economy.

“There’s no doubt that when sentiment turns our members are the first to feel it. Yesterday’s numbers are the first dip in 24 months, and it’s because spending is so sensitive and discretionary and it is the first thing to be affected,” Hart says.

He says it is the general feeling of doom and gloom as much as the effect of the rate rises themselves that causes consumers to stop spending.

“We really need to be talking positively about what the future holds rather dwelling on the sub-prime in the US and the need to slow down the economy. From our perspective you need more spending, not a slow down,” he says.

Retailers are also suffering as interest rates rise, although the effect is far from uniform.

While the sector as a whole struggled in January, computer and console game franchise Gametraders defied the trend with 23% revenue growth.

“We’ve got nothing to complain about at all,” Gametraders founder Mark Langford says. “Because we deal in pre-played games, from our point of view, as the market gets tougher, we see more business; so we’re well positioned.”

But Myer CEO Bernie Brookes yesterday said he expects the sector to face difficult business conditions in the next 12 to 15 months.

“I think some retailers are trying to talk it up, but the reality is it’s going to be tough,” Brookes told The Australian Financial Review.

The comments of these two retailers reflects the fact that interest rate rises are a blunt instrument, with the vulnerable businesses and consumers often the ones who are forced to feel the greatest pain in the effort to rein in inflation.

“There is evidence there is already a tightening in some categories of discretionary spending,” Australian Retail Association chief executive Richard Evans says. “With petrol prices consistently over $1.40 per litre and added cost pressures from drought, floods and rising house prices, the RBA’s decision is penalising those who are already highly geared.

“Australian consumers began restricting their spending from New Year’s Day onwards, starting a downturn that will last at least two more quarters. Our modelling is very accurate – as proven during the peak Christmas buying period – so maybe the RBA needs to rethink its high interest rate strategy,” Evans says.