Retailers might just have a reason to smile this Christmas, with retail sales growth picking up noticeably as we head into the Christmas shopping season.
Retail sales rose by 0.5 per cent in October, exceeding market expectations, to be 3.6 per cent higher over the year. Interestingly, the recent pick-up is being driven predominantly by discretionary spending, which tends to be the most cyclically dependent category of consumption. Usually a rise in discretionary spending occurs when conditions are improving.
With labour markets cooling in recent months, it is some surprise that Australians are opening up their wallets. I would have expected them to be a little more cautious right now, but it appears that the combination of low interest rates and increasing housing and financial wealth has prompted some optimism.
And that optimism is welcome. The September quarter national accounts appear set to be driven by consumption and net exports, with business investment and the government sector also contributing to growth. But forecasters were left scrambling yesterday when it became clear that Australian businesses had run down their inventories during the quarter (as opposed to producing more). As a result, September quarter GDP is likely to be a little weaker than many analysts expected a few days ago.
But as we enter December, the September quarter seems so long ago and no longer of great importance. Sure, tomorrow’s data has the potential to shape our expectations and revise our understanding of recent developments, but I’m certainly more interested in the latest retail sales, employment, house price and investment data.
Yet it’s difficult to get a good read on the economy right now. On one hand, we have improving retail conditions and business investment intentions. On the other hand, dwelling price growth appears to have slowed in several cities and labour market conditions are far from optimal.
Luckily for the economy, consumers are doing their bit right now. If consumption can maintain this type of growth over the next six months, the task of rebalancing the economy becomes monumentally easier. A boost in consumption would allow the rest of the economy some time to adjust, while also supporting a range of non-mining industries.
By state, there are some interesting recent trends. Spending has improved in New South Wales and Tasmania, two of the states that have struggled the most in recent years. Retail spending in Western Australia has hit a wall, having not grown since February. The retail sector has, in recent months, become a little different from what many of us have grown to expect.
Certainly there is some evidence that interest rate cuts are gaining some traction. It is also positive news that consumers may have become a little less cautious about the outlook. The fact that domestic consumers have been fairly gloomy about the Australian economy while the global view on Australia has been much stronger has been a source of constant frustration for policymakers.
I doubt that households will suddenly lose their heads and start spending wildly and running down their savings, but a little more balance would do no harm. Despite the low lending rates, there are enough downside risks for the household sector to keep optimism in check, particularly with regards to the employment situation.
The Reserve Bank’s monetary policy decision is set to come out at 2:30pm. It would surprise almost everyone if they did anything other than keep rates unchanged. But if some members were still a little dovish, then today’s retail trade data – combined with upward revision to capital expenditure expectations – might be enough to change their minds for now.