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Retail sales and new building approvals edge up but for how long?

More data to be released later this month will offer better insight into the next move for interest rates.

After the Christmas/New Year break, the Australian data flow has resumed and the news to kick off 2024 is not quite as bad as some were fearing.

The number of new building approvals, retail sales, and consumer sentiment were all up. Hooray!

But there’s some devil in the detail, which means a cautious and measured response is needed before claims can be made that the worst is over for the economy.

Composite image of a female construction worker, and a Black Friday sale poster in a window for retail sales.
Building approvals and retail sales grew in November but these need to be put into context. (Source: Getty/AAP) (Getty/AAP)

The data revealed a 1.6 per cent rise in the number of new building approvals in November, to a monthly level of around 14,500. For the past 10 months, the number of approvals has edged up from a low of just over 12,000, which is good news.

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This rise needs to be put in the context of an underlying requirement of approximately 20,000 new dwellings per month to keep up the supply of housing needed to accommodate the sharp increase in demand from rapid population growth.

Also by the Kouk:

Problems in the building industry - materials cost pressures and labour shortages - alongside the aggressive interest-rate-hiking cycle from the Reserve Bank (RBA), have had a significantly negative effect on the building industry. These problems are unlikely to disappear in the near term but it’s encouraging to see some recovery in the number of dwellings being approved despite these headwinds.

As cost pressures ease, labour shortages abate and interest-rate pressures ease, the building sector will boom late this year and into 2025.

Black Friday bounce

Also out were data confirming a rebound in retail spending, which rose 2.0 per cent in November after a fall of 0.4 per cent in October – reasonably positive. But - and it is a big but - the Australian Bureau of Statistics noted there was a likely one-off positive effect on spending in November from the Black Friday sales, which started earlier and lasted longer than prior years, likely underpinning the rise in spending.

While superficially positive, as previous years have shown, any apparent strength in retail spending in November is almost certain to be reversed in December. The reason for this is a change in consumer year-end and Christmas spending patterns. Shoppers now tend to ‘spend up’ to take advantage of the sales in November and then pull back sharply in what previously was a period of strong spending in December.

Note that in November 2020, retail trade rose 5.7 per cent before slumping 2.9 per cent in December. In following years, the November/December changes were up 6.0 per cent/down 3.3 per cent in 2021, and up 1.0 per cent/down 3.4 per cent in 2022.

Expect the same pattern when the December 2023 retail data are released. In other words, look for retail spending to fall at least 1 per cent.

Where to next for the RBA and interest rates?

The next meeting of the RBA board is on February 5-6 and the current market expectations are firmly towards ‘no change’ in the cash rate, which was last increased in November to 4.35 per cent.

The faltering economy, which is evident in rising unemployment and free-falling inflation, makes the decision simple. Today’s data will not have much influence on the case for interest rates remaining on hold.

Further out, markets are pricing in a series of interest rate cuts, starting in the second half of 2024 and continuing into 2025. This seems a reasonable expectation but the first rate cut could well be brought forward - possibly to May - if the run of economic data shows weakness and, as is increasingly likely, inflation returns to target.

The next round of data on the labour force - due January 18 - and quarterly inflation – due January 31 - will be vital.

Recall the most recent data showed unemployment heading up and inflation heading down. If this continues, sharpen those pencils for lower interest rates.

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