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Retailers in for a merry Christmas

AMP Capital chief economist Shane Oliver says retail sales should pick up by around 4-5% next year, after four years of barely discernible growth above the inflation rate.

He says nominal retail sales growth has averaged 203% since 2010, which is less than half the rate experienced last decade. Mr Oliver predicts consumers may finally be willing to dip their hands into their pockets, and take up some of the slack as the mining boom slowly fades.

The wealth effect of rising share markets and house prices appears to give consumers confidence to go out and spend. Mr Oliver says that would be good news for Australia, as it would broaden the recovery in non-mining sector growth, rather than just the housing sector. As a result, there could be further upside in consumer discretionary stocks such as JB Hi-Fi (ASX: JBH), Harvey Norman (ASX: HVN), Super Retail Group (ASX: SUL) and Kathmandu (ASX: KMD).

Yesterday, Wesfarmers (ASX: WES) chief executive Richard Goyder said that the ingredients are there for an uptick in retail spending, and retailers could see a happy Christmas after years in the doldrums. Mr Goyder says people tend to be a bit more impulsive around Christmas, so the festive season will be a good indicator of rising retail spending.

Retail sales account for around 20% of Australia’s economic activity and will be vital to lift other sectors of the economy such as advertising which should then flow through to the media sector. The bad news is that rising retail sales could see inflation spark, and force the Reserve Bank to look at raising interest rates next year, if the retail recovery gathers some momentum.

Foolish takeaway

With the resources boom fading behind us, other sectors of the economy need to pick up growth to keep Australia from falling into a recession and higher unemployment. A strong rise in retail sales would be good for all Australians, not just the retailers.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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