Retail sales record 25-month high ahead of Christmas

October was the best month for retailers in 25 months, according to the Commonwealth Bank Business Sales Indicator, suggesting Christmas sales may not be as dismal as initially thought.

The BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities, covering spending broadly across the economy.

The latest BSI rose 0.4% in trend terms in October, the strongest gain since September 2009. It rose 0.3% in September and 0.2% in August, after a 0.2% decline in July.

Encouragingly, only five out of 20 sectors reported weaker sales in October, down from seven sectors in both August and September.

Service providers recorded the strongest gain, up 0.7%, followed by wholesale distributors and manufacturers, transportation and clothing stores, which were all up 0.6%.

Repair services, personal service providers, and automobiles and vehicles were also up, by 0.5%.

The weakest sector in October was miscellaneous stores, down 2.1%, followed by utilities (down 0.3%) and mail order and telephone order providers (down 0.2%).

Meanwhile, seven of the states and territories recorded higher sales in trend terms, led by Tasmania (up 0.8%), NSW (up 0.7%), the Northern Territory (up 0.6%) and WA (up 0.3%).

Queensland and South Australia both recorded a 0.2% rise in sales, while Victoria saw an increase of just 0.1%. The ACT was the only territory to record weaker sales, down 0.2%.

CommSec chief economist Craig James says the results provide “a degree of encouragement” for retailers in the lead-up to Christmas, especially on the back of gains in the previous two months.

“Economy-wide spending posted its best result in just over two years,” James says.

“Importantly, the latest result is for October, before the November interest rate cut took place and, as such, a further pickup in spending is likely.”

Following the rate cut, consumer confidence surged to a six-month high, James says, so the more upbeat consumer mindset should translate into an improvement in spending over coming months.

“In addition, speculation of another rate cut [in] the next couple of months should support confidence and activity levels,” James says.

“The perception by consumers that their finances are in bad shape doesn’t weight up with reality. Unemployment is still low, wages are rising and overseas goods continue to get cheaper.”

“In addition, the household savings ratio is at [a] 24-year high, suggesting consumers have been saving out of choice rather than necessity.”

However, James says financial markets will continue to dictate any further interest rate cuts over the coming year.

“The overnight indexed swap yield in 12 months’ time is 3.45%, suggesting four rate cuts over the period,” he says.

“However, it’s important to note that the Reserve Bank is unlikely to move as aggressively unless the European debt crisis gains traction.”