On Tuesday, the Reserve Bank sounded a cautiously optimistic note on the Australian economy, but as the latest retail sales figures show, that optimism seems based more on hope of what lies ahead than on recent economic activity.
As a general rule, when the RBA keeps rates on hold, the governor’s statement is rather dull reading. The RBA staff love to make use of cut and paste, and often large parts of the text are the same from one month to the next.
This month, however, there were quite a lot of changes and some important ones that suggested a more optimistic tone.
Last month, when summarising the state of the Australian economy, the RBA noted:
While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year.
This month the words used were exactly the same except for the addition of a new clause (new words are in bold):
While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions over the past year. This has been accompanied by somewhat stronger growth in employment and a steady rate of unemployment.
This added mention of business surveys showing better signs led to the RBA concluding rather boldly (for a central bank) that “the prospects for an improvement in economic conditions had firmed a little over recent months.”
This view has also been promulgated by those who suggest the new prime minister will energise the economy through renewed confidence.
So it is a worry that the first business survey published after the decision was AiG’s Australian performance of services index which showed a fall of 3.3 points to 48.9 (a score above 50 indicates the sector is expanding).
Now there’s no need to be too pessimistic, because the PSI had been one of those surveys that had been improving over the previous few months. But the dip did give a bit of pause to those who seem to believe the new prime minister will improve the economy just through improving confidence.
The RBA certainly could point to surveys such as the NAB business confidence index which has been improving since the election of Tony Abbott in 2013:
But in another warning to those hoping the confidence fairy will cure all economic ills, on Tuesday morning – before the RBA made its decision – the latest Dun and Bradstreet business expectations survey showed that businesses were “flagging a drop in sales, selling prices, employment, profit and investment in the first quarter of 2016”.
The survey revealed the average measures of sales, profits, employment and investment had dropped to 17.7 points for the first quarter of 2016, down from 21.8 points for fourth quarter of 2015 – although it remains above the low of 17.2 points recorded for third quarter of this year.
These dips in business confidence and expectations are rather at odds with the increases in consumer confidence reported this week in the ANZ-Roy Morgan survey:
The survey showed consumer confidence rose from 110 point in September to now being 115. But that level still remains below the 20 year average of 116 points.
Consumer confidence is a bit of a fickle thing, however, and is clearly linked with the popularity of the government. In general, Liberal party supporters are more confident when their party is in power. As Turnbull is more popular than Abbott, it is not surprising that people feel more confident.
But will it actually change consumer behaviour?
The latest retail trade figures out yesterday would indicate a need for change, because overall the figures were pretty weak.
Total retail sales grew by just 3.6% over the past 12 months – the worst result in trend terms since September 2013:
But a little caution needs to be taken with the figures. In September last year, the iPhone 6 release saw a massive jump in sales that means it is not too surprising that there has been a drop off in annual growth over recent months:
However, even if we take away the sales figures in the “electrical and electronic goods” sector in order to negate the impact of the iPhone 6 sales, annual trend growth remains at a low 3.6%. The only difference is the fall over the past few months is not as great:
Retail sales growth has in the past 12 months been driven by sales in the electronic goods sector, which is part of the “household goods” industry. Despite accounting for just 17% of total sales, that industry in the past year has contributed at times up to 38% of annual growth:
But for now that growth appears to be over and no other industry has taken its place as the boom sector. Retailers will now be looking to see if this improved consumer confidence will translate into strong Christmas sales.
And it is at that point we will get a real sense of whether the optimism the RBA sees is translating into actual economic activity.
For now the RBA looks happy to sit pat with the cash rate at 2%, but it also realises – despite its hopes for a better tomorrow – that inflation is so weak that it “may afford scope” for further rate cuts “should that be appropriate to lend support to demand”.
If the confidence brought on by Turnbull’s leadership does not translate to improved activity – either via confidence or by actual government expenditure – then the RBA will almost certainly be forced to cut again next year.
