Daily Commentary BY THE CURVE TEAM –

Devil in the Detail for Latest Domestic Data

5th of July, 2018

Hot on the heels of the latest RBA monetary policy decision we received some timely domestic data. Both the retail sales and trade data yesterday were very interesting and will have implications for Q2 growth if current trends continue.

After a slow start to the year, retail sales have put together a solid back to back increase in April and May, The April increase was revised up to a gain of 0.5% and the May result was slightly ahead of estimates, rising 0.4%.

While the headline increase was encouraging, as is often the case, the devil was in the detail. Food continues to help lift total sales with less discounting evident from the supermarkets. A late start to winter has also helped boost sales at department stores and on clothing.

The best bellwether for discretionary consumption, spending at cafe’s and restaurants was down 1% in May with the annual rate slowing to 1.4%. Interestingly, spending at cafe’s and restaurants is only up 0.2% over the past 7 months.

Despite the back to back increase in retail sales the last two months, the annual rate of sales has slowed to 2.5%. Retail sales should be contained by wage growth given consumers lack of appetite for credit and reduced ability to tap into their dwindling savings to boost consumption. So if wage growth remains anchored around 2%, expected consumption to remain subdued.

Even with the weak outlook, the increase in sales, barring a collapse in June, should be a positive for second quarter growth.

A boost to growth from consumption could be needed given the drop of in the trade balance so far this quarter. While remaining positive, the trade balance over the past two months is well down on the monthly balances in excess of $1bln we saw through the first three months of the year.

May’s trade balance game in at $827m, short of the $1.2bln that was expected. It was an improvement on April which was revised down sharply by over half a billion dollars from $977m to $472m. Ironically, despite both imports and exports hitting all times highs in May, the lower trade balances will mean net exports contribute less to GDP in Q2.

While yesterday’s data has implication for the composition of growth in Q2, it doesn’t no contain any material implications for the RBA and their outlook for the economy and monetary policy.

David Flanagan

Director - Interest Rate Markets