Business spending lifts again as confidence grows and rates remain on hold

Business spending has risen for the second straight month as consumer and business confidence was boosted by improving economic conditions and the RBA’s decision to leave rates on hold.

Commonwealth Bank’s Business Spending Indicator, which tracks credit and debit spending at merchant terminals around Australia, rose by 0.2% in September, after rising 0.2% in August.

It is the first time the Indicator has risen for two consecutive months since November 2009, and while the BSI still remains well below where it sat 12 months ago, the trend should give retailers hope that consumer spending might have finally bottomed out.

CommSec chief economist Craig James told SmartCompany today that while the economy clearly remains “soft”, retailers should see spending rise steadily into 2011, as the Australian economies gathers pace.

“You would expect that when you’ve got most states having real wages gains, a good job market and reasonable confidence, that should lead to greater spending,” James says.

“The Government stimulus is now well and truly gone and we are running on economic fundamentals. And the underlying fundamentals are good.”

The September figures show that the best-performed sectors into the month included business services (spending up 1.5%), hotels and motels (up 1.2%), amusement and entertainment (up 1%) and personal services (also up 1%).

In annual terms, the sectors with the strongest gains in September were Service providers (up an impressive 21.2%), utilities (up 7.9%), personal service providers (up 7.8%) and transportation (up 6.0%).

On the downside, spending at mail order and telephone order providers was down 18.5% on a year, with spending on automobile and vehicles down by 12.2% and retail stores (down 9.6%).

James says spending on mail and telephone orders may have been impacted by consumers taking advantage of the strong Australian dollar to shop online. While spending in the sector has been falling since 2008, the speed of the decline has increased in the last six months, as the dollar has risen.

“It has accelerated over the last six months, so perhaps it is the case that people are jumping online and doing their shopping that way rather than buying domestically from these mail order houses.”

James says the BSI highlights the difficult position of the RBA, which revealed yesterday in the minutes of its October board meeting that it is having a tough job weighing up the positive signs for the Australian economy with weak data and the poor performance of overseas economies.

James says that while the medium-term outlook for spending looks good, and this will lead to inflation that the RBA will need to attack with rate rises, actual economic data is still reasonably soft.

He says that while the RBA will not want to wait until it sees the “whites of the eyes of inflation” before lifting rates, it doesn’t need to move now.

“The statement yesterday cab be summed up simply – there’s no rush.”