Market Mover - BNP PARIBAS - Investment Services India

Spending on other areas never did improve
Turning to areas of consumption unaffected by the
stimulus, the tone remains weak. The situation is
especially dire for department stores, which primarily
market big-ticket items that today’s frugal consumers
shun. According to our seasonally adjusted estimates,
department store sales plummeted 4.8% q/q in Q4,
far worse than Q3’s 0.3% drop. While sales on a
monthly basis revived in December on the back of
earlier-than-usual sales campaigns, the level remains
below that of September owing to the steep sales
declines posted in October and November.
Preliminary figures for individual department stores in
January show y/y declines ranging from 0.5% to
roughly 7%. While that might be an improvement
from December, month-on-month sales are generally
flat.
According to METI’s commercial sales statistics,
business also remains sluggish for the retailers of
food and beverages, with nominal sales in Q4 falling
2.0% q/q. While falling prices act to deflate nominal
sales, this sector’s real sales in Q4 were still down
0.6% q/q. Although supermarkets and convenience
stores are desperately trying to shore up sales of
food/beverages by slashing prices and introducing
cheaper private-brand goods, such strategies have
not sparked demand.
Meanwhile, the index of service consumption (a subindex
of the Indices of All Industries) remains weak,
with the reading for October being 0.2% m/m
followed by -0.3% m/m in November, which, when
averaged out, yields a flat trajectory from Q3. As for
service spending moving forward, the December’s
Consumer Confidence Survey’s section on
expenditure plans for services in the coming quarter
shows weakness in all six survey categories (sports,
concerts, amusement parks, household services,
restaurants, self-enlightenment).
Consumption recovery will momentarily falter
The fundamental reason for consumption being weak
is the severe state of households’ income conditions
(inadequate social welfare systems also play a big
part in explaining the structural weakness of
consumption). Most households realise that the drop
in income from 2008 is permanent, and not just the
result of a cyclical shock; households have lowered
their spending levels to reflect this. That winter
bonuses again fell sharply this year only reinforces
the conviction that income has permanently shifted
lower.
Although many companies have returned to
profitability on the back of booming exports, they will
likely maintain a restrictive stance towards payroll
costs as the return rate on capital remains low.
Accordingly, any appreciable improvement in
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Chart 3: Indices of All Industries Activity,
Services Consumption (CY2005=100)
03 04 05 06 07 08 09
Source: METI, BNP Paribas
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2
0
-2
-4
-6
-8
Chart 4: Total Cash Earnings (% y/y)
04 05 06 07 08 09
Source: MHLW, BNP Paribas
Special Cash Earnings
Non-scheduled
Total Cash Earnings
Scheduled
employment/income conditions is unlikely anytime
soon or, as we have stated in previous reports, it will
be a while before a positive feedback loop between
income and expenditure starts to function. Given this
situation, the recovery in consumption will likely falter
in coming quarters as the effects of fiscal stimulus
fade.
That said, all is not completely grim with respect to
household income conditions, as overtime earnings
are rising alongside revived factory activity and the
downturn in scheduled earnings is also easing
thanks to increased working hours (something that
previously had been sharply cut).
With respect to employment, the picture is also
stabilising, with the forward indicator of the job-offer
ratio posting improvement for four straight months.
Thus, the worst seems to be over for
employment/income conditions. While those
conditions might not significantly improve anytime
soon, consumption is unlikely to collapse after the
fiscal stimulus ends.
Ryutaro Kono/ Hiroshi Shiraishi 12 February 2010
Market Mover
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