Melbourne Cup rate cut tipped despite hike in sales

Small business sales increased by 5.2% year-on-year in September, according to the latest ANZ Small Business Trends report, but economists still anticipate a rate cut on Melbourne Cup Day.

The increase in spending marks the fifth consecutive month of positive annual growth in sales for small businesses, although the services and trades sectors continue to outperform retailers.

Ivan Colhoun, ANZ head of Australian economics and property research, says while September saw encouraging headline improvement in sales, year-to-date growth remains flat, up just 1.7%.

“And with headline inflation running at around 3.5% year-on-year in 2011, this implies real small business sales growth is still relatively weak in September,” Colhoun says.

“Furthermore, the divergence between retail-oriented small businesses versus the trades and services sectors continues.”

“Retail-related small business turnover [grew] by just 2.6% year-on-year in September, compared with 6.8% year-on-year for non-retail and services small business.”

The automotive, trade and business services sectors are showing the best growth, according to the report, while restaurant sales continue to perform well, recording 8.9% growth year-to-date.

“Some of this growth no doubt reflects strong food price inflation this year,” Colhoun says.

According to Colhoun, consumer caution remains high as global economic uncertainties continue and local unemployment rates threaten to “drift up”.

“No doubt householders and businesses will be watching the next RBA announcement on Melbourne Cup Day,” he says.

“With the inflation outlook moderating and global economic risks increasing, ANZ expects the RBA will cut rates by 25 basis points as an ‘insurance’ measure and to take monetary policy back toward a more neutral setting.”

“A rate cut on cup day may encourage people to think more confidently about our domestic economic outlook and consequently about their own spending.”

Nick Reade, ANZ general manager of small business, says retailers are facing a “very mixed demand story”, with the more discretionary small businesses struggling to sell.

“Clothing and fashion retailers, and appliances and electrical stores, [are] continuing to face tough conditions,” he says.

The Australian Retailers Association says the industry is desperate for an interest rate cut on Cup Day, hoping this will prompt people to spend.

“Anecdotal reports from ARA members indicate retailers are expecting a slow holiday trading season, much like last year,” ARA executive director Russell Zimmerman says.

“An interest rate cut in November may just save the industry from history repeating itself.”

“The RBA has to form a delicate balance between sectors posting different levels of growth as well as manage inflation levels, but retail is a vital sector in that mix… and [is] unable to maintain growth and viability with interest rates at their current level.”