The official figures show growth in Australia’s retail sector during the past six months is the strongest we have seen over the past decade, excluding the pandemic.
That’s why the Myer profit stumble was such a shock to the share market and why the Reserve Bank will have difficulty justifying an interest rate reduction.
The political pressure on the Reserve Bank board to reduce rates when it meets next month will be enormous so interest rate forecasting is very hazardous. But if they cave into that pressure, there is a clear danger that the Australian dollar will fall further.
My regular readers are well aware that during the final months of 2024 I alerted the market to the fact that retailers who were adapting to the new environment were enjoying strong sales.
The retail sales conclusions from the official figures come not from me, but from former Reserve Bank economist Callam Pickering who is now the Asia Pacific economist for the Indeed global labour hire group.
The non-food Australian retail sector is dominated by imports and the vast majority of those imports are priced in US dollars so Australia is particularly vulnerable to a fall in currency.
Since September last year the dollar has fallen a sickening 11 per cent, albeit the US currency has been rising.
That currency slump boosts the costs of goods dramatically. What lifts our vulnerability is the fact that the Australian two-year and 10-year bond rates are below the US when arguably they should be higher.
For the most part, that underlying currency-driven cost rise was not reflected in prices during the December quarter but it will impact 2025.
In current global conditions a fall in interest rates would probably send the dollar below 60 US cents further boosting the cost of a wide range of goods.
Pickering says that over the past six months, Australian retail spending has increased at a 5.3 per cent annualised pace – compared to past annual growth rates of around 3 per cent – with conditions gradually improving month by month.
Many households continue to struggle with cost-of-living pressures, but their drag on the economy is beginning to wane. Some of those under pressure maybe using credit to maintain purchasing but increasingly spending from both the “oldies” and young people is swamping those who are under pressure.
The Myer fall illustrates that retailers who have not yet adjusted their operations to adapt to the latest changes in the patterns of spending power are struggling. The good news on the Myer front is that it’s doing well online and has yet to benefit from its new distribution centre.
Pickering says boosting overall retail growth is strong population growth; the ‘Stage 3’ tax cuts; wage increases; and the range of federal and state government policies designed to provide temporary support to households.
Adding to the above is rampant overall government spending particularly in states like Victoria, which is still able to keep up its spending via borrowing.
The New York-based rating agency chiefs continue to turn a blind eye to what is happening in Australia and so Victoria was able to join Queensland and South Australia as the three fastest growing retail sales states in November.
Measured over the past six months, the retail momentum has been driven primarily by Queensland, where spending is up 7.3 per cent on an annualised basis, ahead of Victoria (6.8 per cent) and South Australia (6.7 per cent).
The recovery has been more muted in Tasmania (3.6 per cent) and New South Wales (4.5 per cent).
Pickering says spending on household goods is growing at an annualised pace of 8.1 per cent, with spending on so-called ‘other retailing’ up 8.8 per cent (primarily reflecting more spending on pharmaceuticals).
When the Reserve Bank board meets it will know about the impact of those strong retail sales on inflation and it will adjust the headline inflation rate for the substantial subsidies the government is handing out to lower power costs and obscure its high cost energy policies.
Given that these high cost energy policies are only at the early stages of development, the subsidy rate will need to rise substantially to keep a lid on power prices.
There is no sign in the economy of an improvement in productivity and Australia is unique in the world in having a government that actually legislated, via a 700-page industrial relations blueprint, to lower productivity.
In my pre-Christmas market alert, I pointed out that lower interest rates at a time when American interest rates look set to rise would represent a very dangerous course.
Nevertheless some of the signals being passed on to the big banks indicate the Reserve Bank would like to lower rates and reduce pressure on both the government and the bank itself.
And it may happen, but such a strategy would carry incredible risks for nation given the retail strength. big government spending, rising wages and lower productivity.
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