CBA: Retail boomed in August

From CBA:

Retail Trade Preview – August 2019

■ We estimate that the value of retail trade rose by 0.9% in August.

■ CBA’s Household Spending Intentions (HSI) measure, based on a sample of more than 2½ million households combined with relevant search information from Google Trends, indicates tax rebates are being spent.

■ The ABS August retail trade report will be released on 4 October 2019.

One of the key policy announcements in the 2019/20 Budget was tax rebates for low to middle income earners.  These tax rebates are worth around $7½ billion (equivalent to 0.6 per cent of disposable income or two 25bp interest rate cuts).

The inflow of tax refunds into CBA accounts reveals a sharp lift in both the total value of those refunds and the average size of a refund.  Over the July/August period the value of inflows was about 40% above “normal” levels.  The refunds are not surprising.  But the rate of inflow suggests that many households have moved early to lodge their returns and secure their rebates (see here).

The key question pertains to what households do with their tax rebates.  Our working assumption, based on the household response to the 2009 “Rudd cash splash”, has been that households will spend around half of the rebates.  Indeed RBA Governor Philip Lowe remarked in early August that the RBA expects a similar outcome.  Based on $7½bn of rebates that’s around $3¾bn more in household expenditure than otherwise.

If the retail share of that additional expenditure is in proportion to retail’s share of total household consumption (1/3rd) then we are looking at an additional $1¼bn being spent on retail goods and services.  Monthly retail is $27bn, so a boost to retail of $1¼bn over four months (capturing the time it takes for households to file their tax return, receive the rebate and spend) is solid (around $300mn a month).  The early evidence indicates that our expectations are being met.

CBA August Retail Trade forecast

We have “recreated” the ABS retail trade basket using an ongoing sample of more than 2½ million households who are CBA customers.  The spending data is based on credit card usage, EFTPOS, BPAY and direct debit.  And we have combined this data with relevant search information from Google Trends.  In original terms, going back to January 2015, our results have a correlation of 0.99 with the ABS retail trade release (see chart opposite).  In theory, this should provide us with an incredibly accurate estimate of the monthly ABS retail trade outcomes.  But rarely in the economics world are things so simple!  Complications can arise when seasonally adjusting our data as the ABS does not publish forward seasonal factors.  Being slightly out on the seasonal factors can have a big bearing on the headline outcome.

Notwithstanding, when applying our estimated seasonal factors we forecast that retail trade rose by $250m in August.  That equates to a lift of 0.9% over the month.  Revisions aside, the annual rate of retail trade should step up to 2.9%.  Such an outcome will give policymakers confidence that households are responding to stimulus.  But it won’t be enough in our view to fend off further RBA rate cuts.

The index is new and it’s not what the RBA said yesterday:

“The low- and middle-income tax offset (LMITO) was expected to boost household income, and thus support consumption growth, in coming quarters. However, the Bank’s liaison with retailers suggested that this had yet to lift spending noticeably. Members noted that even if the LMITO was used to pay off debts, this would still bring forward the point at which households could increase their spending.”

But we are due some kind of bounce.

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