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Government and businesses drive growthRetail Trade; Consumer sentiment; Government Finance; Balance of Payments
Retail trade: Retail trade rose by 0.1 per cent in January after declining by 0.5 per cent in December. Annual sales growth decelerated to 2.1 per cent from 2.5 per cent.
Consumer confidence: The weekly ANZ/Roy Morgan consumer confidence rating rose by 0.9 per cent to 119.0. Confidence is up by 5.2 per cent over the year and well above the average of 113.5 since 2014 and average of 112.9 since 1990.
Current Account: The broadest measure of the trade accounts – the current account – deteriorated in the December quarter (larger deficit), with the deficit increasing from an upwardly revised $11.0 billion (previous: $9.66 billion) to $14.0 billion.
Government sector: Overall government spending rose by 1.9 per cent in the December quarter after falling by 1.6 per cent in the September quarter.
Debt servicing: The ratio of net income on foreign debt to exports of goods and services stood at 6.2 per cent in the December quarter, near the best levels in 36 years.
What does it all mean?
Consumers began the year in an upbeat mood. Confidence was at 4-year highs in January. Strong jobs growth and record low interest rates lifted sentiment. However, retail spending remained subdued.
Global competition and aggressive discounting is contributing to retail deflation. And the shift to earlier sales periods in October and November (i.e. Cyber Monday and Black Friday) are contributing to a distortion in normally stronger seasonal sales outcomes.
Services sector business surveys had implied that retailers experienced a pick-up in sales during January.
However, retail trade was sluggish.
The inclusion of Amazon’s Australian sales in the retail trade survey, likely provided some support to broader spending. But sales at bricks and mortar department stores continued to languish behind online retailing.
Aussie consumers are a resilient bunch. Global share markets declined with the Dow Jones Industrial Index down by 3.0 per cent over the week ended March 2. US Federal Reserve Chair Jerome Powell’s US Congressional testimony pointed to higher US interest rates and inflation.
US President Trump’s announcement of tariffs on US imports of steel and aluminium weighed on the Aussie share market. The Australian S&P/ASX 200 Index fell by 1.2 per cent (over the week to March 2) on investor concerns over the impact on local producers and the global growth outlook. 
News that national home prices had continued to cool in February failed to upset consumers who chose to focus on positive business investment data.
New business investment grew at the fastest annual growth rate in five years in 2017. And the upgrade in future spending plans were the largest in eight years. This should support continued strong jobs growth.
And a recent survey by Roy Morgan exploring the concerns of Australians has found that Aussies regard economic issues as the most important ‘problem’ (32.3 per cent) facing the nation this year. However, sentiment about current economic conditions in this week’s consumer confidence survey strengthened by a further 5.1 per cent, increasing for two consecutive weeks on the back of business sector strength.
Australia’s trade accounts are in pretty good shape. However, stronger domestic demand, as the economy strengthens, is boosting imports. And exports have declined, pulled down by rural goods. Cereal exports fell from record highs after a bumper harvest season.
The debt service ratio was at 36-year lows in the March quarter at 5.9 per cent and the December quarter ratio of 6.2 per cent was broadly in-line with the historic lows.
The trade accounts are expected to improve even further over the year as LNG exports increase. The bottom line is that Australia is paying its way in the world and easily servicing its debt commitments.
What do the figures show?
Retail trade
Retail trade rose by 0.1 per cent in January after declining by 0.5 per cent in December. Annual sales growth decelerated to 2.1 per cent from 2.5 per cent.
Non-food retailing also rose by 0.1 per cent in January to be up 1.8 per cent over the year.
Spending rose the most for Other specialised food retailing (up by 1.1 per cent), Other retailing (up by 1.0 per cent), Pharmaceutical, cosmetic and toiletry goods retailing (up by 0.8 per cent), Clothing retailing (up by 0.5 per cent) and Cafes, restaurants and catering services retailing (up by 0.5 per cent).
Spending fell the most for Footwear and other personal accessory retailing (down by 3.0 per cent), Liquor retailing (down by 2.0 per cent), Other recreational goods retailing (down by 1.3 per cent) and Department Stores (down by 0.6 per cent).
Spending was mixed across Australian states and territories in January: NSW (down by 0.2 per cent); Victoria (up by 0.3 per cent); Queensland (up by 0.4 per cent); South Australia (down by 0.6 per cent); Western Australia (up by 0.3 per cent); Tasmania (up by 0.3 per cent); NT (down by 0.5 per cent); ACT (flat).
Sales by chain-store retailers and other large retailers rose by 0.3 per cent in January to stand 4.5 per cent higher over the year.
Consumer Sentiment
The weekly ANZ/Roy Morgan consumer confidence rating rose by 0.9 per cent to 119.0. Confidence is up by 5.2 per cent over the year and well above the average of 113.5 since 2014 and average of 112.9 since 1990.
Three of the five components of the index increased in the latest week:
The estimate of family finances compared with a year ago was down from +10.4 to +9.3;
The estimate of family finances over the next year was down from +25.5 to +24.6;
Economic conditions over the next 12 months was up from +7.4 to +12.9;
Economic conditions over the next 5 years was up from +12.7 to +13.7;
The measure of whether it was a good time to buy a major household item was up from +33.5 to +34.4.
The measure of inflation expectations 2 years ahead was unchanged at 4.5 per cent. March 6 2018 3
Economic Insights: Government
Balance of Payments
The broadest measure of the trade accounts – the current account – deteriorated in the December quarter (larger deficit), with the deficit increasing from an upwardly revised $11.0 billion (previous: $9.66 billion) to $14.0 billion.
The balance of goods and services was in deficit by $117 million in the December quarter after a downwardly revised surplus of $1.98 billion (previous: $3.06 billion) in the September quarter.
In real terms exports of goods and services fell by 1.7 per cent in the December quarter with imports up by 1.6 per cent. Export prices rose by 1.9 per cent in the quarter with import prices up by 1.4 per cent.
Exports of rural goods fell by 9.7 per cent in the December quarter in real terms with non-rural goods down by 0.3 per cent. But “net exports of goods under merchanting” rose by 26.8 per cent with non-monetary gold up by 5.4 per cent.
“Other rural” volumes fell by 14.1 per cent with meat volumes up by 0.5 per cent.
“Other mineral fuels” volumes rose by 1.3 per cent with metal volumes down 9 per cent. Metal ores and minerals volumes fell by 11.4 per cent.
The trade sector (exports less imports) will detract from economic growth in the December quarter.
Terms of trade (ratio of export to import prices) rose by 0.1 per cent to 115.1 in the December quarter after a 0.2 per cent fall in the previous quarter. The terms of trade for goods rose by 0.7 per cent and the terms of trade for services fell by 1.6 per cent.
Net foreign debt rose from an upwardly revised $990.4 billion (previous: $989.7 billion) to $1,010.0 billion as at the end of the December quarter – the highest level in 12 months.
Government Finances
Government consumption spending rose by 1.7 per cent in the December quarter after a 0.2 per cent increase in the September quarter. Total public investment rose by 2.9 per cent in the December quarter after a 7.5 per cent lift in the September quarter. Overall, spending by the government sector rose by 1.9 per cent in the December quarter after falling by 1.6 per cent in the September quarter.
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 ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
The quarterly Balance of Payments figures have few short-term effects on financial markets. The importance of the data is merely to highlight Australia’s trading position with the rest of the world as well as the contribution of foreign trade (exports less imports) to the latest estimates of economic growth.
The Australian Bureau of Statistics releases the quarterly Government Finance Statistics near the start of March, June, September and December. The data details public sector consumption and investment spending and indicates the sector’s contribution to economic growth.
What are the implications for interest rates and investors?
Following the release of today’s data we expect household consumption, non-mining business investment and government spending to make positive contributions to tomorrow’s December quarter economic growth (GDP) release.
Retail sales were subdued in January after a strong lift in the December quarter. Consumer confidence remains resilient in the face of modest wages growth. Record low interest rates and strong jobs growth are supporting household budgets.
Price discounting is contributing to retail deflation and news that Costco will be building its first Australian warehouse distribution headquarters in Western Sydney has put large domestic supermarket competitors’ Coles and Woolworths on notice. Up to 1,000 jobs will be created.
The current account deficit is widening as the Australian economy strengthens. Domestic demand is robust. Consumers and businesses are importing more goods and services. Weaker rural export volumes were expected after rising to record highs in the previous quarter. Agriculture is beholden to weather events and bumper harvests lead to spikes in rural exports, especially for grains. Net exports will detract from GDP growth.
This will be more than offset by solid public demand. Government consumption and spending are rising on the back of a public transport-led infrastructure and construction boom.
CommSec expects interest rates to be unchanged until at least the December quarter.
Published by Ryan Felsman, Senior Economist, CommSec