Good news on the economy

This week there was more evidence that the outlook for the Australian economy is improving, with another solid gain in retail sales, a trade surplus and the NAB quarterly business survey confirming the improvement in business confidence evident in other surveys.

• Retail sales rose another 0.5% in December confirming anecdotes of solid Christmas sales and in line with market expectations. What is important to note though is that it is the eighth consecutive monthly gain and annual retail sales growth is now running at 5.7% which is the best outcome since November 2009. In other words retail sales growth looks to be breaking out of the malaise that it’s been in over the last four years that saw annual growth average just 2.7%. This likely reflects a combination of improved household finances on the back of low interest rates, rising wealth levels and improved consumer confidence. This is great news for retailers after a really tough period. We expect these factors to support continued strength in retail sales this year, but probably averaging around 4.5% pa as a return to pre-GFC strength is unlikely as the labour market remains soft.

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• December quarter growth in real retail sales of 0.9% will help ensure a solid contribution to December quarter GDP growth from consumer spending.
• A spike in retail price inflation to 1.1% in the December quarter is consistent with the higher than expected reading in the December quarter CPI but mainly reflects a 1.7% rise in food related prices which is likely largely weather related increases in fruit and vegetable prices. The annual rate of retail price inflation is just 1.3%. So nothing to get too concerned about.
• December trade data was much better than expected with a surplus of $468 million following a revised November surplus of $83m which was the first since December 2011. While the December surplus was exaggerated by a huge bounce in grain exports, the broad improvement in the trade balance after hitting a trade deficit of $3.1bn in November 2012 is very positive. Going forward the combination of reduced mining and energy related capital goods imports (as the mining investment boom winds down) and increasing resources exports (as the new mines and energy projects come on stream) are likely to drive further surpluses ahead.
• The rise in the quarterly National Australia Bank business survey’s measure of confidence from 5 to 8 in the December quarter essentially reflects the improvement already reported in its monthly survey. However, it does highlight the trend improvement in business confidence from a low of -7 in December quarter 2012.

Overall the latest data for retail sales, the trade balance and business confidence add to evidence that there is light at the end of the tunnel for the Australian economy and is consistent with the RBA’s decision to leave interest rates on hold this month. We remain of the view that the RBA will leave rates on hold for the next six months or so ahead of rate hikes later this year as growth improves.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital.

* This article is part of the “It's Time” series in Eureka Report focussing on new opportunities for investors in 2014. Click here to see the entire series.