New data suggests fears about a housing-led spending slowdown in Australia may be misplaced

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  • Concerns about a housing-led spending slowdown in Australia are growing, including at the RBA.
  • New spending data from the Commonwealth Bank suggests spending rose quite strongly in early 2019.
  • That recovery followed a noticeable deceleration in the second half of last year, something that has since been confirmed by official data.
  • The RBA said earlier this month that “uncertainty about the recent momentum of consumption and factors affecting households’ future consumption decisions remained a key risk for the domestic economic outlook”.
  • Financial markets still expect the RBA will cut Australia’s cash rate by the middle of next year.

Perhaps concerns about a housing-led spending slowdown in Australia are misplaced.

According to the Commonwealth Bank, spending across the economy rose strongly in early 2019 despite accelerated falls in home prices.

Its Bank Business Sales Indicator (BSI) — a measure that tracks the value of credit and debit card transactions processed through its merchant facilities — rose by 0.6% in January in trend terms, continuing to accelerate after a noticeable slowdown in the latter parts of last year.

Commsec

After adjusting the raw data to take into account seasonal patterns, spending grew by an even larger 1.2% last month, recovering after falling 0.7% in December.

According to Commsec, 14 of the 19 industry sectors rose in trend terms in January.

“Amongst the biggest gains in sales were transportation, retail stores, hotels and Motels and airlines,” it said.

Sales fell the most in automobiles and vehicles, government services, amusement and entertainment and automobile/vehicle rentals.

Despite the pickup in spending during the month, the annual pace of sales growth slowed to a 12-month low of 5.9%, although that still remained above the 5.6% long-run average.

“In annual terms, all but four of the 19 industry sectors recorded gains,” Commsec said.

“Spending fell by 2.5% in government services with clothing down 1.1%, automobile/vehicle rentals down 1.3% and automobiles and vehicles down 0.7%.

“At the other end of the scale, sectors with strongest annual growth in January included retail stores, transportation airlines and hotels and motels.”

By state and territory, all recorded spending levels were higher than a year ago, led by Western Australia and Tasmania at 10.6% and 8.1% respectively.

Rather than just tracking spending at retail stores like Australia’s retail sales report, the BSI also includes turnover at airlines, car dealers and utilities such as water and electricity companies as well as motels, business, professional and government services and wholesalers.

The bank says that means the BSI is comparable to Household Final Consumption Expenditure released in Australia’s quarterly GDP reports.

The elevated level of the BSI in comparison to household consumption reflects that it only captures nominal electronic spending, a payment method that continues to gain popularity in contrast to payments made in cash.

The BSI did decelerate noticeably in the second half of 2018, coinciding with a slowdown in household consumption in the September quarter and weak retail sales growth in Q4. That alone suggests the continue recovery in spending during January deserves some attention.

While we will have to see whether the trends in the BSI can be sustained, and if it will be confirmed in the official data, the news may provide some comfort to policymakers at the Reserve Bank of Australia (RBA) who are becoming increasingly concerned about potential negative spillover effects from Australia’s housing market downturn.

In February, the RBA board said that if home prices were to fall much further, “consumption could be weaker than forecast, which would result in lower GDP growth, higher unemployment and lower inflation than forecast”.

It also acknowledged that “uncertainty about the recent momentum of consumption and factors affecting households’ future consumption decisions remained a key risk for the domestic economic outlook”.

Although one data release is unlikely to see those concerns dissipate, the strength in the BSI is certainly a welcome surprise.

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