October best month for retail in 25 months, CommBank says, but calls for another rate cut persist

October was the best month for retailers in 25 months, the Commonwealth Bank says, arguing this month’s rate cut and expectations for more decreases, plus solid household budget sheets auger well for the key sector.

The CBA business spending index, which tracks the value of credit and debit card transactions processed through CommBank merchant facilities, lifted 0.4% in trend terms last month, the third consecutive monthly rise.

CommSec chief economist Craig James says the result “certainly provides a degree of encouragement for retailers in the lead-up to Christmas.”

“Especially, given that the latest result follows on the back of gains in the prior couple of months. In fact, economy-wide spending posted its best result in just over two years,” James says.

“Importantly the latest result is for October, before the November interest rate cut took place and as such a further pickup in spending is likely.”

“Following the rate cut consumer confidence surged to a six-month high and the more upbeat consumer psychology should translate to an improvement in spending over coming months.”

“In addition, speculation of another rate cut in the next couple of months should support confidence and activity levels.”

James says consumer pessimism about their financial position doesn’t match reality.

“Unemployment is still low, wages are rising and overseas goods continue to get cheaper. In addition the household savings ratio is at 24-year high – suggesting consumers have been saving out of choice rather than necessity,” the chief economist says.

The best performers were:

• Service providers such security brokers, insurance sales agents, foreign currency providers – up 0.7%.
• Wholesale distributors and manufacturers – up 0.6%.
• Transportation – up 0.6%.
• Clothing stores – up 0.6%.
• Personal service providers such as hairdressers, shoe repair shops and dry cleaners – up 0.5%.
• Automobiles and vehicles – up 0.5%.

But the weakest sales growth was:

• Miscellaneous stores – down 2.1%.
• Utilities – down 0.3%.
• Mail order/telephone order providers – down 0.2%.

The index found that seven of the eight states and territories recorded higher sales in trend terms, and the number of industries contracting fell last month, to five from seven. Two sectors had flat sales.

But in seasonally adjusted terms, the index edged down 0.1% in October, following a rise of 0.2% in September and 0.8% in August.

Peter Strong, executive director of the Council of Small Business of Australia, says sentiment has increased among small business retailers over the past couple of months, but many are concerned that Christmas won’t deliver bumper sales.

“They’re worried about Christmas.”

”People have said, ‘there’s been a rise [in sales] and it’s good, but they don’t look happy,” Strong says. “And after 25 months you can understand that.”

Strong says another rate cut would boost sentiment.

CommSec says although financial markets continue to factor in lower interest rates in 2012, the Reserve Bank is unlikely to move aggressively unless the European debt crisis intensifies.