The RBA just sentenced Australia to economic death
Whew, the wait is over.
The Reserve Bank of Australia didn’t cut rates.
The lead-up to the May meeting was one of the most anticipated and hotly debated RBA meetings in recent memory.
Does that mean we can all move on with our lives?
Um, not quite….
You see, the RBA isn’t giving you the full picture…
RBA numbers don’t reflect reality
The problems with the meeting is that it’s not really over.
If I learned anything from yesterday, it’s that what came out of it will most likely take the rest of the year to unravel.
Not that our central bank will admit that.
You see, the RBA did what it does best. It put out some rosy forecasts — ones that seem far removed from reality.
For example, the RBA has lowered its 2019/2020 gross domestic product (GDP) forecast to 2.75%, down from its initial 3% forecast a couple of months ago.
Yet as recently as November 2018, the RBA was calling for economic growth of 3.5% for all of 2019.
Come March, we found out this figure wasn’t even close to true. The actual growth over all of last year was 2.8%.
But back to yesterday statement’s.
The RBA claims wage growth will pick up, unemployment will fall, and ‘some pick-up in growth in household disposable income is expected’, which ‘should support consumption’.
Consumption, hey? A favourite topic of mine.
Let’s just take a look at this ‘consumption’ and see how it is going to help the Aussie economy, shall we?
Because I’m starting to think the RBA isn’t even looking at the data.
We bought less shoes but more lattes
According to the latest retail sales data, retail sales turnover was up 0.3% for March. That’s a whole 0.1% more than expected.
But the devil is in the detail.
Turnover may have been up, but it was largely driven by food prices. And those food prices had increased because of recent floods and droughts.
What’s more important is the discretionary part of retail sales.
Sales of household goods dropped 0.6 while department store sales fell 1.5%.
The glimmer of hope, however, came in the form of coffee and cafés. Restaurants, cafés and takeaway food outlets saw an increase of 1.2%.
Unfortunately, those figures on their own aren’t worth celebrating.
The most important part of all the retail sales data is the volume statistic.
Because if you drill right down into the figures on a per capita basis, it turns out retail sales are going backwards.
Australian retail sales and house prices
Source: IFM Investors
Per person, Australia wide, we spent 0.1% less in March.
Collectively spending was up, but individually spending was down.
More to the point, this is the first time retail sales volumes per capita have been negative since 2012.
Oh, but this wasn’t the worst news.
Consumption has much further to fall…
Because the same day the retail sales data came out…so did the trade balance data.
When a surplus isn’t good news
Finally, rounding out this gloomy picture is the balance of imports and exports.
Trade surplus — where the value of our exports is higher than the cost of imports — grew to $4.9 billion in March.
This would have been a record high. However, the February figure was revised to $5.1 billion.
On the surface, a surplus sounds good, doesn’t it?
After all, we have been to conditioned to think that a ‘surplus’ means we have spent less then we earnt. It’s a favourite trick of the pollies each election year…reminding us they’ll bring Australia back into a ‘surplus’.
In spite of the positive-sounding headline, a trade surplus isn’t always positive.
More so when you’re not a country that manufactures things for export.
Exporting more than we import tells us that domestic demand is weak.
Let me put that another way.
People and businesses aren’t buying as much. That means there’s less demand for things we normally would bring into the country.
Retail goods like apparel, electronics, coffee and furniture imports would all be lower.
And it isn’t confined to households, either.
Because a higher trade surplus also reflects the lack of business demand for goods used in construction and engineering.
Trade surplus data paints a big picture of the economy.
Not only that, but the March surplus was well above the predicted $3 billion and it was the 13th monthly trade surplus in a row.
We have been growing a trade surplus since January 2018.
This is a telling sign for the overall health of the economy.
Local demand for stuff — whether it be for business, to fill our homes, or to spend at cafés and restaurants — is dropping.
We are bringing less and less into the country.
Meaning we are consuming less and less.
And given the lag between import data and retail sales…we may not have seen the worst yet.
The fall in consumption data could be about to get a heck of a lot worse.
What are they hiding?
Where does that leave you?
Simply put, investors need to ignore the fairy tale story coming out of the central bank.
Hard data is showing us exactly how our economy is faring. It’s almost as if the RBA refuses to see it.
The RBA has gotten virtually every forecast wrong for more than two years.
Anything the RBA says is less about forecasting, and more about trying to prevent people from panicking.
Things are grim for Aussies. But you can prepare your investments to weather the worst of the coming storm.
Until next time,