Australia just received some very promising news on the most important part of the economy

Photo: Francois Nascimbeni/AFP/Getty Images

After a slow start to the year, Australia’s economy is starting to look alright.

Business confidence is high, boosted by operating conditions not seen since before the global financial crisis, and the labour market also appears to be strengthening, recording some stonking employment gains over the past three months.

And now, fresh from learning Australian new car sales hit a record high in May, signs are now emerging that household spending — the largest part of the Australian economy by some margin — is also starting to strengthen, at least according to data released by the Commonwealth Bank earlier today.

The bank’s Business Sales Indicator (BSI), a measure of spending on both goods and services within the Australian economy, jumped in May, registering a healthy increase of 0.8% in trend terms.

And that followed upward revisions to the prior two months data, suggesting that spending was far stronger than what was originally reported.

Source; CBA

The BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities, and covers spending not only on retail goods but also a variety of services.

As such, the CBA deems it to be a measure of “economy-wide spending”, adding that it is a useful guide on patterns in household consumption reported quarterly in Australia’s national accounts.

While the BSI only tracks card spending processed through Commonwealth Bank terminals, given it is the largest retail bank in Australia, it’s a safe bet that what it reports is reflective of what’s happening in the broader Australian economy.

And on that front things are looking far better than what was the case earlier this year.

“Economy-wide spending rebounded smartly in May,” said Commsec chief economist Craig James.

“As we noted last month, the timing of Easter and school holidays may have affected spending levels and a clearer picture of economy-wide spending would emerge with more data.

“That now appears to be the case with data showing solid sales growth in May across all states and territories and industry sectors. This is very encouraging economic news in the face of some recent gloomy pronouncements.”

Thanks to the surge in spending reported in May, the year-on-year increase in the BSI jumped to 8.5% in trend terms, accelerating upon the upwardly-revised 7.7% pace of April.

While it’s a well-known fact that Australians are increasingly doing away with cash to pay with cards, something that undoubtedly flatters the BSI to some degree, it’s a promising sign for economy nonetheless.

Indeed, whether from a category or state and territory perspective, the internals of the May report were all strong, fitting with the idea that broader economic conditions are strengthening.

From a sectoral level, the bank said that spending was either flat or higher in trend terms in 18 of the 19 categories monitored, while sales across all of Australia’s eight states and territories also increased.

On the latter, the CBA said sales in Queensland jumped by 1.1%, outpacing increases of 0.9% and 0.8% in Victoria and New South Wales.

Over the longer-term, sales increased in 17 of the 19 categories tracked over the past year, led by spending on amusement and entertainment which soared by 25.7%.

Across the states and territories, sales all grew over the same period, led by solid gains of 9.8% apiece in Queensland and South Australia. Victoria and New South Wales recorded increases of 9% and 7.6% respectively.

Even Australia’s mining states and territories performed strongly, lifting by 8.1% in Western Australia and 5% in the Northern Territory.

While only the figures from one month, and a measure on nominal spending patterns rather than real consumption levels reported in Australian GDP, it’s clear that despite all the talk that consumers are getting squeezed by cost of living pressures and weak incomes growth, spending levels are not only strong but accelerating, at least through CBA terminals.

On top of recent improvements in labour market conditions, it does offer some hope that the slowdown in household spending seen in recent years may be at or past its nadir, and with it the prospect of even lower economic growth.

The news today will no doubt be welcomed by the RBA, which has been keeping a close eye on the health of Australia’s household sector, not only because of its impact on the outlook for economic growth and labour market conditions but also financial stability risks associated with the housing market.

When it met earlier this month, the bank said that wage growth “remains low” and “likely to continue for a while yet”, noting that “slow growth in real wages is restraining growth in household consumption”.

Given the surge in new car sales in May and the strength in the BSI reported today — both outcomes that have coincided with strengthening labour market conditions — it offers an early indication that the funk constraining household spending may be coming to an end.

We’ll find out more on that front when the ABS releases Australia’s retail sales report for May on July 4.

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