Australia Economy Injured as Vehicle Sales Crash

Australia's vehicle sales drove off a cliff in November as skittish consumers shied away from big purchases, pointing to a miserable fourth quarter for consumption which could well tip the economy into outright recession.

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Thursday's data also underlined the depressed state of the housing market as approvals to build new homes took a surprise spill to seven-year lows, overshadowing a record trade surplus.

"Car sales have been in a tail spin for a while but now they seemed to have crashed," said Rob Henderson, head of market economics at nabCapital. 

Figures from the Australian Federal Chamber of Automotive Industries showed vehicle sales fell 22.2 percent in November, compared to the same month last year. Seasonally adjusted, sales dropped 9.8 percent from October, to 71,647.

Toyota's sales slid 16.6 percent from a year ago, while the Holden unit of General Motors and Ford both suffered falls of 22 percent.

"It suggests consumption could be flat, or even down, this quarter," warned Henderson. "There's an awful lot riding on the Christmas shopping season. Rate cuts and government give-always had better help or we're looking at a very ugly quarter."

The Australian economy had already ground to a halt in the third quarter, with growth at an eight-year low of just 0.1 percent and household spending static.

Trying to avoid recession, the Reserve Bank of Australia has slashed interest rates by 3 percentage points to a six-year low of 4.25 percent, by far the most aggressive easing since the recession of the early 1990s.

The government also weighed in with a A$10.4 billion (US$6.8 billion) stimulus package, much of which hits wallets next week.

"It's hard to think that all this stimulus won't have an effect in the end," said Su-Lin Ong, a senior economist at RBC Capital Markets. "But right now, it's looking like consumption will contract this quarter and that just adds to the case for yet more rate cuts."  She sees the cash rate hitting 3.5 percent by March.
     
Home-Less

Other figures out on Thursday showed approvals to build new homes sank 5.4 percent in October to 10,370, confounding forecasts for a 0.7 percent rise and the lowest since early 2001.

Ironically, the weakness of home building means Australia is at less risk of suffering the sort of collapse in house prices that has caused so much devastation in the United States.

Economists estimate Australia has actually been building around 40,000 homes a year less than required by population growth and immigration, so there is no overhang of empty homes.

That helped keep house prices up 2.8 percent in the third quarter, from a year earlier, while prices of U.S. single-family homes were down a record 17.4 percent in September.

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Australia has another advantage as steep cuts in official cash rates have fed directly through to mortgage rates, bringing payments on an average mortgage down by around A$500 a month.

In contrast, the U.S. authorities have had far less luck bringing down mortgage rates even though official rates have been cut to just 1 percent.

Indeed, reports on Wednesday suggested the U.S. Treasury was considering using state-backed Fannie Mae and Freddie Mac to offer 30-year mortgages at a low 4.5 percent.
     
Coal Rush

One bright spot for Australia on Thursday was news of a record trade surplus of A$2.95 billion for October, well above the A$1.6 billion expected.

Imports were flat while exports climbed 6.7 percent, thanks mainly to a 20 percent jump in the value of coal sales. But even that may not last much longer.

Exports values are still benefiting from huge increases in iron ore and coal prices for annual contracts settled back in April and March while global commodity prices were still red hot.

Since then, however, the world has tipped toward recession and resource prices have plunged. The Reuters-Jefferies CRB index of a basket of commodities has sunk 52 percent since July to carve out a six-year trough.

Steel mills in China and Japan, Australia's two biggest export markets, have slashed production and miners have responded by reducing supply. If demand does not improve soon, the major miners face substantial price cuts on contracts next year.

Copyright 2008 Reuters. Click for restrictions.