Retail spending rose by 1.0 per cent in June after lifting by 0.8 per cent in May. In the June quarter retail trade rose by 1.4 per cent in real (inflation-adjusted) terms.

• In the June quarter, retail prices rose by 0.1 per cent, but they were down by 0.2 per cent over the year – the biggest annual deflation in eight years.
• Australia recorded a turnaround on trade with a deficit of $313 million in May transformed into a small $9 million surplus in June. Exports fell by 0.4 per cent and imports fell by 1.6 per cent.
• We estimate that net exports (exports less imports) will boost economic growth by 0.5 percentage points in the June quarter. The current account deficit is estimated at $12.3 billion or 3.4 per cent of GDP.
• In 2011/12, 84 per cent of all Australia’s exports were denominated (invoiced) in US dollars with 13.7 per cent invoiced in Australian dollars. Of imports 56.4 per cent were invoiced in USD and 30.6 per cent invoiced in Australian dollars.

What does it all mean?

• Is it all a mirage? We’ll find out in the next few months. But the recovery in spending seems to be reading like a well scripted play. Retailers have enjoyed a much needed boost to sales over the past two months, all thanks to an array of stimulatory measures. Sizeable rate cuts, Federal government handouts, tax changes and lower petrol prices, have provided consumers with a perfect storm of positive drivers, while also alleviating pressures on household budgets. Add in lower prices and why wouldn’t consumers be spending?
• The $64 question is what happens when the effects of the stimulus wear off. Hopefully, consumers are now seeing the glass as half-full, not half-empty. But the risk is that spending has merely been brought forward. More positively, prices fell in eight of 15 categories in the June quarter. And if deflation continues, Aussies will keep spending.
• The deep rate cuts would have provided a boost to confidence but it wouldn’t have had a material impact on household budgets in the short term. Rather the windfall one-off Federal government assistance payments allowed consumers to accelerate planned purchases with department stores and clothing & footwear retailers the lucky recipients. Even cafes, restaurants and takeaway food outlets benefited from a pickup in sales. In effect the one-off payments have provided a short-term leg up for businesses in a period of tough trading conditions.
• The better-than-expected retail sales result resonated across all the states. And in annual terms the mining states continue to be enjoying the large slice of activity. Price-adjusted retail sales across Western Australia stand 10 per cent higher than a year ago, while sales in the Northern Territory are up over 5.3 per cent. The improvement in retail activity and hopes of strong sales in subsequent months will certainly limit retailers from cutting further staff in the near term.
• Despite the improvement in sales there is no doubt that lower pricing continues to play a key part in enticing a rather nonplussed consumer. Most businesses would tell you that it is hard work to make a quid. The key is an ongoing improvement in confidence, until confidence levels stage a sustained improvement it is likely that sales will be patchy.
• Australia recorded a small trade surplus in June but there are few people that would rejoice or bemoan the result. Simply, the trade figures have few implications nowadays.
• Looking forward, trade surpluses are still likely although the vagaries of the commodity cycle, strength in the Australian dollar, and growth in consumption and investment goods are likely to depress the magnitude of any surpluses. Over the longer term the strength of the Asian region will play a key part on Australia’s trade position. The recent rate cuts and further additional stimulus by Chinese authorities should ensure that volumes of coal and iron ore exports will increase over time and support the shift back to surplus.

What do the figures show?
Retail trade

• Retail trade rose by 1.0 per cent in June after a 0.8 per cent rise in May. Annual spending growth lifted from 2.1 per cent to 3.7 per cent.
• All categories rose solidly in June except household goods (down 0.2 per cent).
• Sales rose across all states and territories, led by Northern Territory, up 2.8 per cent. Slowest sales growth was in South Australia, up 0.7 per cent.

Real retail trade

• In real (inflation-adjusted) terms, retail spending rose 1.4 per cent in the June quarter after a similar rise in the March quarter. Annual spending growth rose from 2.5 per cent to 3.9 per cent, above the decade average of 3.6 per cent.
• Inflation is under control. Retail prices rose just 0.1 per cent in the June quarter after falling by 0.6 per cent in the March quarter. Over the past year retail prices fell by 0.2 per cent, the biggest decline in eight years.
• Across the states NSW led the gains in the June quarter (up 2.6 per cent), followed by Western Australia (up 2.2 per cent). Tasmania recorded the biggest weakness (down 0.6 per cent in the June quarter) followed by Victoria (down 0.2 per cent).
• The biggest gain in the quarter was by Footwear & Other Personal Accessory retailers, up 8.7 per cent, with spending at Pharmaceutical Cosmetic and Toiletry Retailing up by 6.8 per cent.
• Spending at “Specialised Food Retailing” (butchers, bakers, fruit, seafood stores), fell by 0.4 per cent in the June quarter with  Furniture, Floorcovering And Textile Goods Retailing down by 0.6 per cent, Newspapers & Books down 1.1 per cent and “Other Recreational Good” retailing (sporting goods, toys, video games) down by 1.3 per cent).

International trade

• As expected, Australia’s trade position was largely balanced in June. Overall a surplus of $9 million was achieved after a deficit of $313 million in May. It was only the second surplus in six months.
• Exports of goods and services fell by 0.4 per cent (goods down 0.5 per cent) while imports of goods and services fell by 1.6 per cent (goods down 1.5 per cent).
• Rural exports rose by 5.9 per cent. Non-rural exports fell by 2.8 per cent.
• In 2011/12, 84 per cent of all Australia’s exports were denominated (invoiced) in US dollars with 13.7 per cent invoiced in Australian dollars. Of imports 56.4 per cent were invoiced in USD and 30.6 per cent invoiced in Australian dollars.
• In short, it doesn’t matter where goods are sent or received from, the US dollar and Australian dollar matter most.

What is the importance of the economic data?

• The Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’. Retail trade covers spending at a broad range of retail outlets but excludes both petrol and motor vehicle sales. A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks. But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.
• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.

What are the implications for interest rates and investors?

• The Reserve Bank will be encouraged by the retail sales data but also retain a sense of scepticism. A perfect storm of positive factors boosted spending in May and June and they can’t be relied on to carry the can in coming months.
• The deflation in retailing means that rate cuts are still on the agenda. We are still pencilling in a rate cut by end year.

 3 August 2012