Retail Sales Up 0.7% in June, but Further Rate Cuts Are Coming

The Australian Bureau of Statistics (ABS) released retail sales figures for June today. In a rare bit of good news for the economy, the results bettered expectations.

Turnover was up by seasonally-adjusted 0.7% in June, from 0.4% in May. Economists had expected to see a repeat of 0.4% again this month. But the ABS data shows retail sales smashed forecasts almost twofold.

Better still, the retail sector had its best month overall since February.

The question now is whether this news will influence the Reserve Bank’s decision on rates. It didn’t matter much this month, as the RBA weren’t likely to lower rates anyway. But it was a convenient bit of timing nonetheless.

As it happens, the data was released on the same day the RBA had their monthly meeting. The figures added credibility to the RBA’s decision to keep rates on hold. But it may take more than one month of positive retail sales to keep rates steady at 2%.

But the figures could give the RBA breathing space to hold out for a few more months before cutting again.

Retail figures provide a respite for policy makers

The performance of the retail sector must come as a relief to both the RBA and the government.

We’ve already seen the RBA cut rates twice this year, shaving 0.50% of the cash rate. They did so in a bid to make exports more competitive. But consumer and business spending factored into their thinking in equal measure.

The government supported the rate cuts by incentivising businesses to spend in its 2015–16 budget. They provided a sweetener by allowing tax write offs for purchases up to $20,000.

But it’s interesting to see that households outspent businesses in June. Sales of household goods, like electronics and housewares rose 2.2% month-on-month. Other retailing, which includes things like cosmetics, was up by 2% in June from May.

Retail sector in a bind

The retail sector wants to see the RBA lower rates again to boost spending. But the better-than-expected data only adds to the RBA’s reluctance to follow suit.

However, the retail sector may get its way in the end.

Over the next few months the likelihood of a rate cut will only increase. The ABS released figures showing the trade deficit worsened in June. It grew to $2.9 billion, which was just below expectations. But the deficit is likely to grow as revenues from exports continue to decline.

That partly explains why 90% of analysts recently surveyed expect another rate cut by early next year.

It’s only a matter of time then before the RBA acts again.

Mat Spasic,

Contributor, Markets and Money

PS: The RBA will fail in their attempt to prop up the Aussie economy. Lower rates will only lead to more pain in the long run.

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