Did the Australian economy hit a pothole or speed bump in January? The surprise slowdown in retail sales figures for the month suggest it may have hit an unexpected hole after consumer confidence fell sharply in the month and continued falling in February.
More importantly, revisions to figures for November and December might see lower than expected 4th quarter Gross Domestic Product figures in the National Accounts later today, especially with a surging trade deficit draining more than expected in the quarter.
It’s only one month and it is dangerous to extrapolate on that basis, but as retail sales showed no growth whatsoever in seasonally adjusted terms from December, compared to a 0.5% growth estimate from the market, the question needs to be posed.
Especially after the Australian Bureau of Statistics also cut the 0.5% estimate for growth in December to 0.4% and also cut the November estimate to 0.5%. The original estimate for November was a rise of 0.8%, so there has now been a very noticeable slowing in retail sales in the three months to the end of January when they stalled.
But as unemployment fell to a 33 year low of 4.1% in January, there’s every sign the economy is not running roughly, more unevenly with the credit crunch, petrol prices, rising interest rates and a change in sentiment in financial markets being major factors.
Consumer confidence is at 15 month lows after the savage share sell off in January, rising interest rates from the banks and then the RBA decision on February 5 and more rate rises knocked consumer and business confidence lower according to surveys from the Westpac/Melbourne Institute and the National Australia Bank.
The downgrading of retail sales might mean that fourth quarter gross domestic product growth could be weaker than previously estimated.
Sales at restaurants and hotels dropped 0.6% from December and sales of household goods fell 0.5%. But recreational goods rose 3.4% and turnover at department stores rose 1.8%, so it’s not a general reduction in spending, or one that’s concentrated on discretionary purchases.
It’s also a question some economists, most notably Dr Shane Oliver, the AMP’s head of Strategy have been asking when they wonder if the RBA could be going too far in attacking inflation so aggressively.
He believes there’s a danger of tipping the economy into recession with too aggressive a campaign of rate increases and the retail sales figures will add to that point.
But it seems the RBA rate rises are now on hold for a while for the RBA to see if the 1% plus in the past seven months has an impact.
Building approval figures for January will be out later in the week and will give us another glimpse into January.
Market estimates are for GDP growth of 0.7% or 0.8% in the December quarter, for an annual rate of 3.8% to around 4%. The revisions to retail sales means that could be a touch lower.
But the major influence will be the larger than forecast impact from our worsening external account position.
Instead of the balance of payments deficit cutting between 0.5% and 0.7% off growth in the quarter (according to most market forecasts) the ABS said today that the higher than expected deficit would cut 1% from GDP. With inventories trimming an estimated 0.2% from GDP, the eventual figure could be 0.5% or less, which would represent a significant slowing
But the figure the RBA will focus on is growth in domestic non-farm GDP.
Despite the fall in seasonally adjusted terms, the original figures issued by the ABS show that retail sales in January were 8.1% higher than in January 2007, while in December they were 7.6% higher than in the same month of 2007. Much of that reflects the strong rise in sales in the first half of 2007.
The Australian dollar fell on the news, dropping about one-third of a US cent to 93.62 USc, from close to 94 USc just prior to the release at 11.30 am.
The ABS said the quarterly current account deficit, seasonally adjusted, rose $2,997m (18%) to $19,349m. The deficit on the balance of goods and services rose $2,071m (43%) to $6,860m. The income deficit rose $913m (8%) to $12,440m.
"In seasonally adjusted chain volume terms there was an increase of $2,502m (29%) in the deficit on goods and services. This could be expected to detract -1.0 percentage points to growth in the December quarter 2007 volume measures of GDP," the ABS said.
And to complete a trio of miserable reading releases a reminder that we are a heavily indebted country.
The ABS said our net International Investment Position rose $53.3 billion to a net liability position of $736.8 billion at the end of December.
"The increase was driven by a net price change of $35.8 billion, the highest value recorded for this series. Net foreign debt was $610.0 billion, an increase of $24.2 billion. That represented 57.2% of year ended September quarter 2007 nominal," the ABS said.
Net foreign equity increased by $29.1 billion to a liability of $126.9 billion.
In all the talk about higher interest rates and mortgage stress, everyone forgets that the country as a whole is under considerable stress from a debt burden that just won’t stop growing.
The current account deficit in the December quarter of $19.3 billion, represented 7.1% of September quarter nominal GDP.
Both the trade and net income deficits widened in the quarter. The rise in the trade deficit reflects ongoing weakness in export volumes and strength in import volumes.
The terms of trade rose by 0.7% in the December quarter to be 1.3% higher through the year.
