Perfect storm hits trade accounts; Flat retail

Retail Trade; International Trade

• Flat retail trade: Sales were flat in April after ten prior months of gains. Annual spending growth eased from 4.4 per cent to 4.1 per cent, mildly below the decade-average growth rate of 4.4 per cent.
• Strongest growth in the month was by “Clothing retailing” (up 3.1 per cent)” and “Cafés, restaurants and catering services”(up 1.2 per cent). The biggest drop in sales in the month was recorded by “Footwear and other personal accessory retailing” (down 2.2 per cent), and “liquor retailing” (down 2.1 per cent).
• Trade deficit: Australia’s trade deficit widened from $1.2 billion in March to $3.9 billion in April – the highest monthly trade deficit on record.
• Australia’s annual exports to the US hit a near 6-year high of $12.3 billion in the year to April. Australia’s annual exports to India rose to a 17-month high of $9.6 billion.

What does it all mean?

• The latest batch of data came in weaker than expectations. Retail sales were flat while the trade deficit blew out to a record high $3.9 billion in April. On first glance the numbers certainly look disappointing but the flat retail sales result follows ten solid months of gains, and the trade deficit was largely driven by a perfect storm of negative factors. Export growth collapsed due to adverse weather conditions in April and imports surged driven by a surprising $1.2 billion lift in machinery and industrial good imports. On a positive note the lift in machinery imports will drive capacity and growth over the longer term.
• Interestingly consumption good imports have lifted for five out of the past six months and are up almost 10 per cent on a year ago. At face value this maybe an early sign that consumer activity is lifting and as a result more goods are being imported. However given the slide in the Australian dollar, and sluggish economic activity, the lift in imports is more likely a price effect – the weaker Aussie dollar essentially making it more expensive to purchase imports.
• Overall the retail result highlights that activity is ok without being great. Low and stable interest rates and the lift in wealth levels are supporting consumer spending. Add in the impact of the solid demand across the housing sector and it’s no surprise that furniture, floor coverings, home ware, textile and electrical/electronic goods retailers are enjoying the benefits of a construction boom. In fact furniture, floor covering and home ware retailers are seeing annualised growth of almost 12 per cent. While spending on electrical goods was up 7.7 per cent in April compared with a year ago.
• There has been a clear shift in consumer preferences. Housing-related spending is in. And that is largely being driven by the fact spending on “essential” items food, clothing, alcohol, tobacco and transport – a record low – essentially leaving more room in the household budget. No doubt the anticipated ongoing lift in housing activity should bode well for retailers over the second half of 2015.
• Over the past decade there has been a fixation on trade with China. But in the past year, there has been a broadening of focus. Exports to China may be at a 21-month low, but exports to India are at a 17-month high while imports are holding at record highs and with growth accelerating to a 29 per cent annual pace. And the US has again become a focus for Australian exporters with the annual value of exports at 6-year highs.
• In the short-term, the fortunes of Australia’s external trade accounts rests squarely on the mining boom. However from a longer term sense, exports will continue to benefit from a falling Australian dollar. In addition the rebound in activity across emerging economies and the US certainly bodes well for Australian coffers.
• Looking forward, the May rate cut and the likelihood of an extended period of low interest rates should support activity over the medium term. In addition, the ongoing lift in housing activity will support a further lift in spending.

What do the figures show?

Retail trade – April

• Retail trade was flat in April after lifting for the prior ten consecutive months. In trend terms, retail trade grew by 0.3 per cent in April.
• Non-food retailing was also flat April after rising by 0.2 per cent in March. Non-food retail spending is up 4.5 per cent on a year ago.
• Sales by chain-store retailers and other large retailers fell by 0.6 per cent in April to be up 5.3 per cent over the year.
• Sales rose in four of the eight states and territories, led by the ACT (up by 0.6 per cent), and Victoria (up by 0.5 per cent), and South Australia & Northern Territory (both up by 0.1 per cent). ). Sales fell in Tasmania (down 0.9 per cent), followed by Queensland (down by 0.6 per cent) and Western Australia (down 0.1 per cent). Sales were flat in NSW.
• Strongest growth in the month was by “Clothing retailing” (up 3.1 per cent), “Cafés, restaurants and catering services” (up 1.2 per cent), and “Newspaper & book retailing” (up 1.1 per cent).
• The biggest drop in sales in the month was recorded by “Footwear and other personal accessory retailing” (down 2.2 per cent) andliquor retailing” (down 2.1 per cent).

International trade:

• Australia’s trade deficit widened from $1.2 billion in March to $3.9 billion in April – the largest monthly trade deficit in records going back almost 45 years. It was the 13th consecutive monthly deficit.
• In April, exports of goods and services fell by 5.7 per cent (goods down by 7.4 per cent) while imports of goods and servicesrose by 3.9 per cent (goods up 5.1 per cent). Exports are down 8.1 per cent on a year ago, while imports are up by 2.5 per cent.
• Rural exports fell by 0.8 per cent in April after falling by 2.5 per cent in March. Non-rural exports fell by 7.7 per cent in April after falling by 2.3 per cent in March.
• Within imports, consumer imports rose by 4.3 per cent with capital goods imports up by 9.8 per cent while intermediate goodsimports rose by 4.0 per cent.
• Consumer goods imports are up 9.6 per cent on a year ago while capital goods imports are up by 10.1 per cent and intermediate goods imports are down by 3.3 per cent.
• Australia’s annual exports to China stood at $81.3 billion in the year to April – a 21-month low. Annual exports were down 19.2 per cent on a year ago. Exports to China accounted for 31.6 per cent of Australia’s total exports – a 22-month low.
• Australia’s annual imports from China rose from $54.9 billion to a record high of $55.1 billion in the year to April, up 11.6 per cent on a year ago. Imports from China account for a record 21.7 per cent of Australia’s total imports.
• Australia’s rolling annual trade surplus with China hit a 44-month low of $26.2 billion in April, well down from the record high of $51.17 billion set in April 2014.
• Australia annual exports to the US hit a 6-year high of $12.3 billion in the year to April. The share of annual exports going to the US hit a 5-year high of 4.8 per cent.
• Australia’s annual imports from India rose from $3.3 billion to a record high of $3.5 billion in the year to April. Rolling annual imports from India are up 28.5 per cent on a year ago.
• Australia’s annual exports to India rose from $9.5 billion to a 17-month high of $9.6 billion. Rolling annual exports to India are up 11.8 per cent on a year ago.

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?

• Consumers are still spending, albeit modestly. The boom in home construction will continue to be a key driver of a lift in retail activity over the coming year. More and more Aussies are either building or buying homes. And if you are moving into new digs, most likely that means new carpets, curtains or even a lounge suite. And that reasoning will continue to play out in the official data over the coming year.
• Given the reliance on the mining sector to drive exports, there is no doubt likely to be more volatility in future monthly trade data
• The Reserve Bank will remain on the interest rate sidelines over coming months. .