Aussies update wardrobes; Record trade deficit

International trade; Retail sales

• Retail trade lifts: Sales rose by 0.4 per cent in March after a revised 0.1 per cent lift in February.
• In real (inflation-adjusted) terms, retail trade rose by 0.5 per cent in the March quarter after lifting by 0.6 per cent in the December quarter. In real terms sales were up 2.4 per cent on a year ago – below the decade average of 2.9 per cent.
• Strongest growth in the month was by “Clothing retailing” (up 2.2 per cent) followed by “Other recreational good retailing” (up 2 per cent). The biggest drop in sales in the month was recorded by “Furniture, floor coverings, houseware and textile goods retailing” (down 1.4 per cent)
• Trade deficit: Australia’s trade deficit narrowed from $3.04 billion in February to $2.16 billion in March. It was the 24th consecutive monthly deficit. The rolling 12-month deficit stood at a record high $45.7 billion in the year to March.

What does it all mean?

• At face value Aussie consumers seem to be spending albeit cautiously. Retail sales rebounded after virtually a flat result in February. It was encouraging that activity levels lifted in six of the states and territories.
• Looking at the break-up of sales, it appears that consumers were spending up in clothing stores and enjoying the outdoors. Clothing sales rose by over 2 per cent in March to be up 9 per cent over the year – just shy of two-year highs. Sales of recreational goods such as – sporting goods were strong in March alongside spending at and specialised food outlets like butchers and fruit and veg shops. It is likely that the early timing of Easter would have had an impact on the result.
• It is pretty clear that activity levels have been mixed. Overall non-food retailing rose by just 0.2 per cent after a tepid 0.1 per cent lift in the prior month. While there have been periods of strength, Aussie retailers have been facing their share of headwinds. Interestingly inflation adjust sales is holding at just 2.4 per cent – below the decade average of 2.9 per cent. And given the deflationary environment, it will be tough for retailers to lift prices over the coming year.
• From a fundamental standpoint, household balance sheets remain healthy. Super low interest rates and falling petrol prices have all resulted in more savings. While the improvement in job security has resulted in consumers feeling comfortable to spend some of that additional savings. However there is a degree of caution particularly in the early part of 2016.
• The next couple of months have the potential to see softness in activity given the upcoming Federal Election. However the latest interest cut by the Reserve Bank may offset some of that caution.
• The trade accounts remain firmly in the black. Not only have the trade accounts been in deficit for almost two consecutive years, but the 12-month rolling annual deficit came in at $44.5 billion – the largest deficit in monthly records going back 45 years. However the trade data doesn’t have the impact on the currency that it once did.
• The data out today is unlikely to alter the Reserve Bank’s view on how the economy continues to evolve. It’s clear that a lower currency will be required to continue to support the rebalancing across the economy – particularly in light of providing a further boost to Australia’s rural and services exports. And the latest rate cut is a step in that direction of providing another avenue to stimulate growth. Looking forward another rate is likely if inflation remains subdued.

What do the figures show?

Retail trade – March month

• Retail trade rose by 0.4 per cent in March after a revised 0.1 per cent lift in February. Retail trade is now up 3.6 per cent on a year ago. In trend terms, retail trade grew by 0.2 per cent in March.
• Non-food retailing rose by 0.2 per cent in March after rising by a tepid 0.1 per cent in February. Non-food retail spending is up 4.1 per cent on a year ago.
• Sales by chain-store retailers and other large retailers rose by 0.4 per cent in December to be up 6.4 per cent over the year.
• Sales rose in six of the eight states and territories, led by Western Australia (up 0.7 per cent), Tasmania (up 0.6 per cent), Victoria (up 0.5 per cent), NSW (up 0.4 per cent) and Queensland and South Australia (both up 0.2 per cent). Sales fell the most in the ACT (down 0.6 per cent) and the Northern Territory (down 0.2 per cent).
• Strongest growth in the month was by “Clothing retailing” (up 2.2 per cent) followed by “Other recreational good retailing” (up 2 per cent), “Other specialised food retailing” (up 1.8 per cent) and “Liquor retailing” (up 1.4 per cent).
• The biggest drop in sales in the month was recorded by “Furniture, floor coverings, houseware and textile goods retailing” (down 1.4 per cent) and Other specialised retailing” (down 1.2 per cent).
• “Department stores” recorded a 0.9 per cent decline in March.

Retail trade – March quarter

• In real (inflation-adjusted) terms, retail trade rose by 0.5 per cent in the March quarter after lifting by 0.6 per cent in the December quarter. In real terms sales were up 2.4 per cent on a year ago.
• Retail prices lifted by 0.1 per cent in the March quarter after 0.6 lift in the December quarter.

International trade:

• Australia’s trade deficit narrowed from $3.04 billion in February to $2.16 billion in March. It was the 24th consecutive monthly deficit. The rolling 12-month deficit stood at a record high $45.7 billion in the year to March.
• In March, exports of goods and services rose by 4.3 per cent (goods up by 0.4 per cent) while imports of goods and services rose by 0.7 per cent (goods up by 0.4 per cent). Exports are down 1.3 per cent on a year ago, while imports are down by 0.9 per cent.
• Rural exports fell by 2.5 per cent after sliding by 6.5 per cent in February. Non-rural exports rose by 2.4 per cent (gold up 58.3 per cent) after rising by 2.7 per cent in February.
• Within imports, consumer imports down by 2.2 per cent with capital goods imports up by 1.9 per cent while intermediate goods imports rose by 0.6 per cent.
• Consumption goods imports are up 8.5 per cent on a year ago while capital goods imports are down by 10.5 per cent and intermediate goods imports are down by 8.9 per cent.
• Australia’s annual exports to China stood at $79.4 billion in the year to March. Annual exports were down 5.3 per cent on a year ago. Exports to China accounted for 32.6 per cent of Australia’s total exports.
• Australia’s annual imports from China eased from record highs of $62.01 billion to $61.68 billion in the year to March, up 12.5 per cent on a year ago. Imports from China accounted for 23.2 per cent of Australia’s total imports in March.
• Australia’s rolling annual trade surplus with China held near recent 5-year lows. The annual trade surplus was $17.73 billion in March, well down from the record high of $51.16 billion set in April 2014.
• Australia annual exports to the US eased $13.56 billion to $13.5 billion in the year to March and just down from a record high of $13.69 billion in the year to October 2015. But the share of annual exports going to the US lifted from 5.53 per cent to a fresh 7-year high of 5.54 per cent.
• Australia’s annual exports to India eased further from the two-year high of $10.34 billion set in the year to December to $9.91 billion in the year to March.

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?

• China dominates Australia’s trade relationships but the lift in trade with the US and India is encouraging.
• The Reserve Bank knows that the Aussie dollar is a two-edged sword. Consumers love a stronger currency as it means cheaper overseas travel and imported goods. But a stronger Aussie makes it more difficult for businesses, especially exporters and those in regional and rural regions.
• At present there is no rush to move rates in any direction. A subdued June quarter inflation read, released in late July would allow Reserve Bank policymakers to cut rates even further.