Call to cut rates as business expectations drop for March quarter, consumer spending weak in December

The latest reports from both the Australian Chamber of Commerce and Industry and the Commonwealth Bank show both business investment and consumer spending remains weak.

The data will no doubt bolster hopes among SMEs the Reserve Bank will cut interest rates at its meeting in two weeks.

Both results are disappointing and far from what SMEs had hoped for in the new year, especially as international economic activity seems to be picking up.

The Commonwealth Bank Business Sales Indicator has found spending dropped by a seasonally adjusted 1.9% in December, despite a rise of 2.4% in November. Most analysts had expected a rise given the busy Christmas spending season.

Spending was strongest in transportation and government services, up by 1.8% and 1.4% respectively. Overall, 12 industry sectors contracted in December, with the weakest, service providers, down 3.6%.

On an annual basis, only four sectors contracted, with service providers once again the weakest, down 5.6%. Sales rose most in Victoria and the ACT, followed by New South Wales and Queensland.

The BSI has risen for 18 consecutive months in Queensland and for 14 straight months in the ACT. In annual terms, all states and territories have improved.

Lex Thornton, general manager of operation and sales strategy at the Commonwealth Bank, says the result in December is reflective of an inconsistent year, due to consumers who are wary of spending anything.

“Although the overall economic picture showed signs of improvement in the latter half of 2012, consumers are still proceeding with trepidation. If consumers remain prudent, it is unlikely that we will see any consistent or significant spending trends form in the near future.

“We know that many small businesses across the country were hoping for a buoyant festive season. While we saw a lift in spending in November, unfortunately the BSI showed that sales softened throughout December.”

However, CommSec economist Craig James did say the December results showed the underlying pace of sales has increased for a fifth consecutive month, which provides some hope for the new year.

But the latest results from the Australian Chamber of Commerce and Industry suggest SMEs are in for a tough ride.

The latest results from its Survey of Investor Confidence have shown most actual and expected business indicators are in contractionary territory for the December quarter, with some in their lowest levels since 1998.

Expectations for the March quarter have also declined to a new low, with sales and profit expectations down alongside the measure of “expected number of full-time employees”, which fell to a 15-year low.

ACCI chief economist Greg Evans said the index of sales and profits has fallen since 2010 with no sign of rebounding.

“It is worrying that despite recent rate cuts by the Reserve Bank, manufacturing and construction industries continue to report weak performance and declining business sentiment. Businesses
consider more needs to be done to lift business confidence in 2013, including further rate relief.”

Economists are mixed on whether the Reserve Bank will cut rates in two weeks. While some believe the current economic data, such as these two surveys, suggest a downward trend, others believe recent inflation will give RBA more reason to wait.

The Australian Retailers Association yesterday said the RBA should cut rates to 2.5%.