Consumer spending indicator records highest growth in almost two years

CommSec says a report showing consumer spending recorded its highest growth in almost two years suggests brighter times for business activity and the retail sector.

The Commonwealth Bank Business Sales Indicator, which tracks the value of credit and debit card transaction processed through the bank’s merchant facilities, rose by 0.2% in trend terms last month – the strongest lift in spending in 23 months.

According to the indicator, which covers spending on automobiles, personal services and airlines in addition to retail, gains were highest for wholesale distributors and manufacturers, business services and repair services.

A majority of the states and territories – five out of eight – recorded higher sales in trends terms.

“We’re seeing strength in states like New South Wales, which had the best growth in 10 months,” CommSec economist Savanth Sebastian told SmartCompany this morning.

Sebastian says the Reserve Bank refusing to move on the official cash rate throughout 2011 has prompted businesses and consumers to “tentatively start spending again” and the prospect of a rate cut is “also a drawcard”.

“And if we do get one [a rate cut] in next few months, it might shore up confidence,” Sebastian says, noting it is “encouraging” that the recovery seems to be broad-based. Just four of 20 sectors contracted last month, while two remained flat, and the remainder lifted.

Also helping the case is Australia’s low unemployment rate. “Across the country, we’re seeing strong employment. Most people have held onto their jobs, and now there are signs they’re willing to part with their hard-earned cash.”

Sebastian says the September result “certainly seems to suggest brighter times ahead for the retail sector and business activity, but it’s important to remember it’s off a low base”.

“We’ll need to see a couple more months of strengthening activity before we draw any conclusions.”

He added that comments from the International Monetary Fund yesterday that “downside risks have increased and are severe” are not surprising, but the Reserve Bank had plenty of ammunition if the global economy crashed. Australia’s businesses are also cashed up post-GFC but too tentative to spend, although many have been hard hit due to changes in consumer behaviour, he says.

“Australia is well-placed to weather a storm – the Chinese economy is growing at a sustainable pace, and any slowdown in China is self-induced so they can turn on the stimulus tap if they want to.”

Sebastian adds it’s not yet clear whether the RBA will cut rates next month, saying data over the next fortnight – particularly inflation figures next week – will be the deciding factor.