The average punter can be left a little confused by the constant parade of economic data. For instance, one month spending can be down, only to rebound the following month. So determining the true state of play can prove a little difficult.
But there is much less cause for confusion when you look at the data over a longer-term horizon. The case in point is the latest retail spending data. We now have the results for the full 2010/11 financial year – and it doesn’t make for pretty reading. Over the 12 months to June, Aussie consumers spent just over $245 billion at retail businesses like department stores, supermarkets and clothing outlets. It may sound like a lot, but it was only up 2.6% on the previous year – the smallest increase in spending in almost 50 years – since 1961/62 to be precise.
That’s right, the smallest increase in spending in 50 years. Now one possible reason for such weak growth is the fact that the Aussie dollar has been rising, causing many imported goods to become substantially cheaper. But when you remove price effects from the data, the actual volume of goods (or how much we actually bought) was only up by 1.3% in 2010/11. That is the weakest result in 20 years – since the last recession in 1990/91.
So no matter how you cut the figures, consumers haven’t been spending. The key question is why. Certainly there have been a host of reasons put forward. Some have pointed to consumers buying goods overseas. Others point to Aussies travelling overseas and fewer travellers coming to Australia. Yes, those factors have been important. There is also the slowdown in population growth – fewer migrants coming to our shores. Then there has been the constant focus on “living costs” – higher utility fees, fruit and vegetable prices. And throw into the equation the good old-fashioned excuse of fear – fear of higher interest rates, the carbon tax, a new global financial crisis – you name it, we have become more cautious and decided to save, not spend.
But whatever factor you’d like to blame, the inescapable conclusion is that ultimately we are all to blame. We are the ones not spending. And that is despite the fact we have a strong job market, real wage gains, record wealth levels and cheaper prices for imported goods. Sure, some goods may have increased in price, but we can change our behaviour. It’s a case of shopping around for the best deals, meaning that we can continue to spend, save a little as well, and still maintain our high standard of living.
At the end of the day if we don’t cheer up soon, we’ll talk ourselves into a recession.
In the coming week in Australia, lending figures and the job market are in focus. In the US, a meeting of Federal Reserve policymakers dominates the agenda together with the latest retail sales figures.
In Australia the week kicks off with July data on job advertisements from ANZ. While the number of ads lifted 3.7% in June, this followed declines of 7% in the previous two months. Clearly businesses have become cautious about taking on more staff.
On Tuesday, housing finance figures for June will be released. While the number of loans bounced more than 4% higher in May, a large part of the gain represented refinancing activity by borrowers. And even after the lift, home loans are still down 3.1% on the start of the year. We expect that home loans lifted another 2% in June, again under-pinned by refinancing activity by cash-strapped borrowers.
On Wednesday, broader lending figures are released – covering commercial, lease and personal loans as well as the housing finance data reported the previous day. The May lending figures represented a rare piece of good news in an otherwise soggy economic environment. New loans lifted by 6.1%. While this was only the second increase in lending in five months, the hope is that another gain can be chalked up in June.
On the same day Westpac and Melbourne Institute release consumer sentiment figures. Little change is expected with confidence currently at 26-month lows. While the Reserve Bank left rates on hold this month, it returned to its traditional “hawkish” language. In addition share prices have slumped and the Aussie dollar has retreated from highs. In short, confidence levels may not have improved much over the month.
On Thursday, the Bureau of Statistics issues the monthly employment and unemployment data. Over the past three months employment has effectively gone nowhere. In fact the number of jobs has actually gone backwards by just over 5,000 and there have been three months of job losses in the past five months.
And just as employment has effectively been becalmed, indeed the unemployment rate has also been static at 4.9%. In July we tip a 15,000 increase in jobs – effectively covering new entrants to the job market. As a result, the jobless rate is expected to be unchanged at 4.9%.
In the US, the data releases of the week kick off with the employment index on Monday with productivity and unit labour costs data to be released on Tuesday.
On Tuesday, the Federal Reserve’s Open Market Committee meets to decide monetary policy settings. In previous meetings, the FOMC has examined its “exit strategy” – the strategy to gradually remove stimulus from the economy and move to a tighter stance. That strategy will clearly have to stay on ice for some time. In fact discussion will probably shift 180 degrees, with debate on whether another bout of quantitative easing will be required. If the topic comes up, and there is a degree of committee support, then sharemarkets will celebrate.
On Wednesday the monthly budget figures for July will be published – a report likely to generate more activity than it has in the recent past. And wholesale inventory/sales data is issued.
On Thursday, weekly jobless claims data is released together with monthly trade data. And on Friday, retail sales and consumer sentiment figures are issued. Economists hope for a 0.4% lift in July sales.
Elsewhere, China releases its monthly economic data on Tuesday, including spending, production and inflation.
The Australian earnings season begins in earnest in the coming week. Among companies listed to report on Monday are Bendigo and Adelaide Bank, JB Hi-Fi and PrimeAg. On Tuesday CBA, Bradken and Cochlear are amongst those to issue earnings with Flexigroup and Stockland slated for Wednesday. Alumina, News Corp, Telstra, SingTel and Webjet are on the earnings list for Thursday with Billabong and Harvey Norman expected to report results on Friday. NAB has a trading update on Tuesday.
The US economy has clearly lost momentum and investors have priced this weaker outlook into sharemarkets across the globe. Despite the fact that Australia has much more in common with China than the US, our sharemarket has also suffered in the global downgrade. As a result we have trimmed our sharemarket forecasts. We now expect the All Ordinaries to end 2011 at 4,950 (ASX 200 4,850). The All Ords is expected to be near 5,100 in June 2012 (ASX 200 5,025) and seen at 5,400 by the end of 2012 (ASX 200 5,350).
Economists may be locked in debate about the next move in cash rates, but borrowers are unlikely to care too much – fixed term rates have already come down. Clearly this represents great news for business borrowers and those looking to fix some or all of their home loan repayments. Provided that the recent falls in yields are maintained, financial institutions will be prompted to pass on the cheaper borrowing to more lending products, benefitting a range of clients. Three-year swap yields currently stand at 26-month lows and have fallen by 70 basis points over just the past month.
The Aussie dollar is clearly a fair-weather friend, very sensitive to changes in view on the global economy. Yesterday the Aussie hit US106.75 cents, just over two cents lower than the 29-year high set a week ago.
Craig James is chief economist at CommSec.
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