Australia’s domestic economy still hurting…more storm clouds on the horizon

I want to be optimistic, I really do – perhaps we need to write more articles about mining but today more evidence that the Australian domestic economy is hurting and that there remain some stormy skies ahead. Unfortunately the data was unequivocally weak, fortunately only a super big inflation outcome at the end of this month for Q2 would see the RBA hike in August. We don’t think that’s going to happen though.

So let’s look at the data.


The chart above is of the TD Securities-Melbourne Institute Inflation index. It showed that prices month on month were unchanged  in June after increases of 0.3% and 0.2% the previous 2 months. The pull back in inflationary pressures has seen the annual rate of the inflation index fall back below RBA’s upper band of 3% to 2.9%.

Importantly even though core reading of inflation rose by 0.1% in June after it was flat in May  which implies that the ABS’s core reading for the quarter to be released at the end of this month is likely to be less that the 0.75% implied in the RBA’s forecasts.

So the catalyst for an August hike is likely to be absent – OPTIMISM 🙂

Unfortunately we now have to deal with the sector that is bearing the brunt of the structural adjustment in debt reduction and pressure from high interest rates in the economy – retailing. I saw a segment on the ABC’s Business Insiders program yesterday about a company BeeDee bags (I think) and the boss said his numbers were really good and quite strong year on year. Which I found really interesting but at the time I thought it said more about his business and his ability to select good clients than the overall state of the retail market.

Unfortunately today’s retail sales release for May showed a big fall of 0.6% mom after the market had been expecting a gain of 0.3%. The pull back was broad based with Food (-0.4%), Household Goods (-0.2%), Clothing (-1.8%), Department stores (-1.4%) and ‘other (-1.6%) all falling while spending at cafes and restaurants was the only subsector the buck the trend with sales up 0.4%. incidentally spending at cafes and restaurants was the only sector to fall last month.


With the increased volatility of the series the we prefer to look at the trend rate of sales which has flat lined at 0.3% per month over the past month over the past 4 months after it dropped into negative territory in October and November last year.


Despite the recent pick up the trend rate of annual total sales growth remains anemic at best. SO mr Bee Dee bags is certainly doing well in a really tough market.

Building approvals which were terrible, dropping 7.9% in May against expectations of a 0.5% fall. Public approvals fell 12.6% but only accounted for 3% of the overall fall. It was the volatile Private non housing, otherwise known as medium density dwellings, component which did the damage, falling 20.1% over the month while private housing approvals edged up 0.7% but the clear downtrend remains.


Finally we got ANZ job ads which rebounded 3.7% in June after falling 6.5% in May and 0.4% in April.  It along with the NAB survey and skilled vacancies suggests that softer outcomes for employment are expected to continue in the months ahead


All up the weakness in today’s data will continue to give little ammunition for the RBA to hike rates. With inflationary pressures easing as the weakness in the non-mining sectors proving to be enduring rather than temporary then a rate hike this year looks to me a diminishing probability.  The implied rate hike for the next year has fallen back to only 4 points even though some Major bank economists are still calling 1%. And the AUD/USD is off a touch but its  being buoyed by global factors. A weakening domestic economy probably makes it very hard to get through the 1.1013 high anytime soon.

Indeed we would go so far as to say any RBA tightening until the domestic side of the economy sustainably and substantially picks up would be a serious policy error on behalf of the RBA. They don’t make many of them so we don’t think it will happen.

Greg McKenna and Team.

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at or Greg directly on

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  1. Happy RBA Day! | Lighthouse Securities - July 5, 2011

    […] media and on the nightly news. But I want you to think about that again because now that the data (see yesterday’s piece as an example)  is flowing the way we have been saying for months (in this space since we started in May and […]

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