Australia | Nov 04 2010
By Greg Peel
“Another month, another disappointing sales report,” says Westpac. “Consumers remain super-cautious on spending,” says CommSec. It's just as well there's a commodity boom going on or one would be hard pressed to justify a rate hike otherwise. What? Coal exports down 21% in a month?
Australian retail sales registered a rise of 0.3% in September, below economist expectations of 0.4%. In the September quarter, sales were up 0.7% compared to 1.1% forecasts. In the June quarter, retail sales were growing at an annual pace of 6.0%, but that pace had fallen to 4.4% in September, Previous consumer upturns, notes Westpac have typically delivered 8-10% annual growth.
But we're clearly not in any king of upturn – anyone who's been to a shop lately and noted the amount of discounting going on knows that. Gerry Harvey knows that. He simply can't shift new whizz-bang teles and has called it the worst recession he's ever seen. But then again, we're not actually in a recession, are we? Food spending dropped in the September quarter, notes CommSec, for the first time in 21 years.
Australia's trade surplus fell by $686m in September to $1.76bn, compared to economist forecasts of $2.0bn. Exports were down 1.5% by dollar value in the month and imports were up 1.4%. In August, exports fell 2.7% and imports fell 6.1%. Coal export values to Japan fell 20.7% from August, notes ANZ, and 7.0% to China (which doesn't actually buy a lot of coal from us given its own reserves). Coal represented the bulk of the net fall in exports. Rural exports fell 8.2%.
ANZ is forecasting weaker iron ore and coal prices in the December quarter and is thus expecting the trade surplus to fall further. The turnaround in the import number was largely due to strength in fuel and “non-monetary gold”. In other words, the gold price has increased demand for jewellery imports.
The RBA expects Australia's “large expansionary shock” to impact shortly and swiftly on inflation. Spare capacity is running out, and that includes the unemployed “reserves bench”. In other words, the commodity boom will impact on the wider economy by pushing up prices. In raising rates on Tuesday, the RBA was making a preemptive strike on what it is sure will soon occur.
Dunno where though. At least not in the shorter term. For five months, the RBA kept the cash rate on hold. For five months (all year actually) retailers have been discounting stock. Department stores have only managed to increase earnings by laying off staff (who presumably then go and drive Tonka trucks in the Pilbara). Yet still the trend in retail sales – the point at which the economy meets the everyman – shows slowing growth. Westpac notes that in its last consumer confidence survey, a jump in the numbers suggested perhaps sales might shortly pick up.
Not now though. Not after Tuesday's rate rise.
Nevertheless, all economists admit that retail sales numbers can be quite volatile and that even the Big Wet across the country would have had a negative impact on the September numbers. While export numbers were down in dollar terms in the month, a count-back for a stronger Aussie actually means volumes were up, notes ANZ, although not in coal. But then the RBA is fully aware that the strong Aussie does a lot of work for the central bank in curbing inflation.
Recent Chinese data suggest the Chinese economy has rolled back into accelerated growth. But then that just increases the likelihood of another Chinese rate rise. Beijing is also expected to revalue its currency at some time in the near future. This will not impact on AUD/RMB because (ceteris paribus) a stronger renminbi implies a weaker USD which implies a strong AUD/USD meaning no net change. But it will reduce US demand for Chinese exports, and China uses Australian commodities to manufacture exports to the US.
But Glenn obviously knows what he's doing, having been embarrassingly caught out in late 2007/early 2008. The RBA had left its cash rate at 6.25% all the way from November 2006 to August 2007 despite the growing Chinese-backed commodity boom. From August 2007 to March 2008, the RBA was forced to hike four times to 7.25%. China had cunningly lulled central banks into a false sense of security by “exporting deflation” through ever lower prices for teles and fridges et cetera. But when the USD started wavering and oil shot up to US$147/bbl, the RBA had to move swiftly and painfully.
The US dollar fell, of course, because the Fed was dropping its cash rate in response to what was then merely a “credit crisis”. In one instance, when Bears Stearns was rescued, the Fed dropped its rate by a “shock and awe” 75 basis points. It has been estimated by the Fed that the US$600bn of QE2 announced last night is the equivalent of taking the cash rate 75 basis points below zero.
I hope there's not a pattern here – Fed cuts, RBA hikes, global economy….
