Sales index shows slight improvement for retailers but next interest rate decision “critical”

The timing of the next interest rate rise decision is “crucial” to the long-term viability of many retailers, one economist has warned after the latest Commonwealth Bank Business Sales Indicator found the industry recorded growth only marginally in May.

The Business Sales Indicator, which measures the value of credit and debit card transactions processed through Commonwealth POS terminals – grew by just 0.02% in May, although this is a welcome reprieve from declines recorded in the past few months.

CommSec economist Savanth Sebastian says the result is “encouraging”, although admits the industry “isn’t shooting the lights out”.

“Given the indicator has been falling for the past few months, the fact it’s been negated seems to suggest we are starting to turn around, albeit marginally.”

“We’ve seen some categories doing well, particularly the recreational categories, but it also doesn’t mean the retail sector is going to stop discounting any time soon.”

Only four of the 20 sectors in the indicator recorded weaker spending, with retail stores down by 0.3% and automobiles and vehicles down by 1%

However, the biggest increases in spending were in the amusement and entertainment categories, up by 1.4% and contracted services and utilities both up by 0.9%. In annual terms, amusement and entertainment is up by 12.3%.

“I think this improvement comes alongside the fact the RBA has remained on the interest rate sidelines for the past six months,” Sebastian says.

“That’s helped, because confidence is a fragile commodity and the last thing the economy needs is another rate hike.”

Economists are divided on when the next rate hike will occur – some believe it could be as early as August, while others such as Westpac’s Bill Evans believe November will see rates rise again.

“You have consumer confidence going down in the past couple of months, and profitability has been affected. If you look at the states, six of them have gone backwards this month in terms of activity, and New South Wales was the worst performing state,” Sebastian says.

Many retailers believe the emergence of online is another factor weighing them down, with many submitting to the Productivity Commission that online sales need to be taxed and that the $1000 GST threshold on goods imported from overseas such be substantially dropped or even scrapped altogether.

Sebastian says it would be wise not to over-estimate the impact online retail has on the overall economy, but also notes this will become an increasingly more important issue.

“I think online is still a very small component, however, it’s also hard to go out there and measure that.”

“I think it’s safe to say this is an area that will grow exponentially, and the strength of the dollar is certainly one thing that will determine the fortunes of online spending. At the moment, it suggests activity will pick up.”

Ultimately, he says, the fate of the industry rests with the RBA’s decisions, commenting the next rate decision is “crucial”.

“The timing here is important. A further rate hike would cripple the sector and add to borrowing costs. It would mean that spending comes off the boil and a lack of momentum is not a good thing.”

“However, if it were in the last quarter of the year, when activity has picked up and is more robust, it wouldn’t necessarily be a bad thing. But we need to see if the data remains as weak as it has been in the past few months.”