Spending across the Australian economy is 'good without being great'

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Spending levels across the Australian economy continued to lift in July, adding to a growing list of evidence that suggests the economy is continuing to strengthen.

The Commonwealth Bank’s Business Sales Indicator (BSI) — a measure of nominal spending on both goods and services within the Australian economy — increased by 0.3% last month in trend terms, leaving spending levels up 8.1% on a year earlier.

Source: Commonwealth Bank

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 likely reflects broader spending patterns across the broader Australian economy.

“Consumers may not feel confident, but they are still spending. The latest retail trade data showed this to be the case and the BSI has confirmed this also,” said Craig James, chief economist at Commsec.

“Businesses are also spending alongside government bodies,” he said, adding that “overall spending is good without being great”.

Despite the lift in spending levels, the July result was below the 0.7% average seen over the past 12 months. It also followed a 0.4% increase in June, hinting that the strong momentum seen earlier in the year is now starting to moderate.

At 8.1%, the year-on-year figure was also fractionally below the 8.3% growth rate reported in June.

While the annual increase is not doubt flattered by the continued switch away from cash to card-based spending, it also coincides with a noticeable improvement in labour market conditions from the levels seen in 2016.

Despite the recent moderation, spending levels improved across all Australian states and territories in July, and for most individual sectors.

By location, the strongest increase was seen in the Northern Territory where spending levels rose by an impressive 1.2%. It was followed by the ACT (1%), Queensland (0.7%) and Tasmania, Western Australia, Victoria, South Australia and New South Wales where sales rose by close to 0.2%.

Over the year, spending levels grew the fastest in the ACT at 10.8%. The Northern Territory, Queensland and Victoria also recorded gains in excess of 10%. Western Australia, at 6.6%, recorded the weakest growth across the country.

Mirroring the strength in the state and territory performance, spending levels also increased across most individual sectors monitored by the Commonwealth Bank in July.

According to the BSI, spending levels rose in 16 of the 19 industry sectors monitored in July, including in many discretionary areas.

The biggest increases were recorded at airlines (1%), service providers (0.9%) and at clothing stores, hotels and motels, and transportation which grew by 0.8%, more than offsetting declines of 0.4% for spending on automobiles and vehicles and at retailers.

The weakness in the latter remains a concern given it is the second-largest employer in Australia behind healthcare. Clearly constrained household budgets and fierce competition is continuing to weigh on nominal spending levels at retailers.

Over the year, spending on service providers, airlines, amusement and entertainment, and government services all increased by more than 15%, indicating that the strength was not just on non-discretionary goods and services but in discretionary areas too.

Spending at mail and telephone order providers was the only category to register a decline over the year, sliding 7.4%.

While spending levels rose strongly across many categories over the past year, it will be interesting to see the split between discretionary and non-discretionary areas later in the months ahead as higher energy prices are absorbed by households and businesses.

According to analysis from ANZ Bank, the average Australian household power bill will increase by around $200 in the current financial year, placing further pressure on household budgets that, in many instances, are already struggling with record-low wage growth and high levels of indebtedness.

As a consequence, that means that the outlook for discretionary spending, and for some retailers, is looking increasingly bleak, says Joanne Masters, senior economist at ANZ.

“Given that electricity is largely a non-discretionary expense, any rise in electricity bills is likely to be matched by a reduction in discretionary spending, adding further pressure to already-struggling retailers,” she said in a note released last month.

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