In many respects consumers are the missing ingredient in our economic cake. Higher savings ratios and careful spending is not only occurring against a subdued outlook for the Australian economy – it’s one of the causes. A reluctance to spend has an obvious impact on retailers and their share prices. Is it time to buy?

According to retail sales data released earlier in the month the retail environment remains constrained. July sales were expected to increase by around 0.2%. Instead they were flat. The reading is particularly disappointing in light of the improvement in the second quarter of the year. Q2 saw annualised growth in retail sales of 1.5%. Not great, but a significant lift on Q1’s 0.2% and the average 0.5% over 2016.

Wages and inflation are inextricably linked by consumer behaviour. Wage increases lift consumer spending, putting upward pressure on prices and inflation. Increasing prices induce business expansion, increasing demand for labour and then wages. This process feeds on itself. The problem for the economy in general and central bankers in particular is how to kick start this virtuous circle.

Business investment is picking up as the drag from the mining boom drops off. The key to economic recovery is therefore in the hands of the consumer. However the lowest wages growth in decades is weighing on consumer sentiment. The concern has eased somewhat. Australian household savings ratios have dropped from above 10% to just below 5%, but this is still indicative of conservative consumers.

Economic optimists suggest this weakness in wages is largely a function of the economic cycle, and will turn (eventually). The pessimists put the lack of wages growth down to structural factors. Increasing automation and increasing use of technology means businesses need fewer workers. More and more workers are shifting into the “gig” economy, doing piecework as contractors.

This fracturing of the workforce gives individuals far less bargaining power, and some suggest companies are exploiting this softer employment market. The doomsayers maintain this structural change means wage growth will never return to “normal” levels again.

However a pick-up in job advertisements that correlates to the fall in unemployment in recent years indicates at least part of the current softness in wages is cyclical. Once this cycle starts it can be hard to slow, and eventually leads to outbreaks of higher inflation. That’s a problem for another time.

Global growth expectations are moving upward consistently for the first time since the GFC. The next twelve months will likely expose the question of whether the current low level of wages growth is temporary or permanent. Share markets price the future, so investors may not wait for the final result if there is an uptick at the next reading of the wage price index due in November. The optimists may start moving on retail stocks before then if other growth related data remains positive.

Fear of Amazon has driven retail stocks to lower levels over the last two months. The sell down may be viewed as sentimental rather than numeric, especially considering the fact that Amazon accounts for around 3% of all USA non-food sales. How quickly do the bears think that Amazon can grab markets share in Australia?

Contrarian investors are running their rulers over the sector right now. Just like questions surrounding wages the retail sector is subject to both structural and cyclical factors, meaning not all stocks are primed for strong recoveries. Myer reported last week that in the most recent half year like for like sales fell by around 1.5%. It’s difficult to reconcile their often stated rationale of a weak retail environment with the breakdown of the quarterly retail sales data that showed department store sales grew at 0.4% in Q1 and then 3.1% pa in Q2.

On the other hand Retail Food Group is a much more interesting proposition. RFG franchise well-known names like Michele’s Patisserie, Gloria Jean’s, Dunkin Donuts, Crust Pizza and many others. Trading near yearly lows, analysts expect it to grow sales at around 5% pa over the next three years. After the recent sell down it’s trading on a lower Price to Earnings ratio of 10x, and has an estimated dividend yield including franking around 9.5%. Tasty.