Australians Encouraged to Shop for the Economy

Australian retail sales surged in December as government hand-outs, lower borrowing costs and falling petrol prices boosted household spending power, providing vital support to an economy teetering on the brink of recession.

The 3.8 percent jump in seasonally adjusted sales was the biggest in over eight years and far above median forecasts of a 1.4 percent increase, data showed on Wednesday.

The strength owed much to the Labour government which lavished around $5.6 billion in cash payments on retirees and low-income families in December to support the economy in the face of the global financial storm.

"When people are given big piles of money some of it is going to end up in electronics and household goods and department stores," said Stephen Walters, chief economist at JPMorgan.

Sales at department stores climbed 8.3 percent in December, while spending on household good jumped 9.9 percent and clothing 5.8 percent.

The Australian dollar initially edged higher after the data, but quickly faded. It rose to $0.6516 before backing off to $0.6480.

Debt markets were weak, focusing more on a fall in U.S. Treasuries.

Analysts suspected retail sales would sag in January and February as the impact of the one-off payments faded, but December's strength still meant that the fourth quarter looked better than before.

"It means retail sales were strong for the whole quarter and, as they make up 25 percent of gross domestic product (GDP), provided a very good cushion for the economy," said Brian Redican, a senior economist at Macquarie.

The boost was timely as the A$1 trillion economy grew by a bare 0.1 percent in the third quarter and there has been much speculation it shrank in the fourth, like many other developed countries. That would have put it on the path to recession,  commonly described as two consecutive quarters of GDP declines.

"It suggests there's much less risk now of a negative GDP reading for the quarter," said Redican.

That would be welcome news to Prime Minster Kevin Rudd who this week swore to "move heaven and earth" to avoid recession.

To that end, the government on Tuesday announced a second package of fiscal stimulus worth A$42 billion (US$26.5 billion). Of that, around A$2.7 billion in cash payments would be made in March and another A$8.3 billion in April.

The latest package took to A$78 billion the total stimulus spending announced since last September.

"The sales numbers really highlight that the stimulus package is working," said Warren Hogan, head of Australian economics at ANZ. "If it's one of the government's goals to avoid two consecutive quarters of contraction, they may achieve that."

If so, it will come at the cost of more borrowing. The government on Wednesday said it would now issue between A$22 billion and A$24 billion of debt in the next five months, far above previous estimates.

Mortgage Relief

Consumer spending power has also been underpinned by falling mortgage rates. The Reserve Bank of Australia (RBA) cut its key cash rate by 100 basis points to a record low of 3.25 percent on Tuesday, taking total cuts since September to a hefty 4 percentage points.

Mortgage rates have fallen by almost as much, meaning monthly payments on an average mortgage have fallen by over A$600.

Investors also expect the central bank to keep cutting toward 2.0 percent, given the rapidly deteriorating outlook for the global economy bodes ill for Australia in the near term.

Data on Wednesday also pointed to trouble ahead. Government figures showed approvals to build new homes dropped 2.9 percent in December, adding to a 10.2 percent dive the month before and extending a very weak run for housing construction.

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A survey of the Australian service sector showed activity in January contracted for the 10th straight month, although there was some modest improvement in retail and hospitality.

The main measure of activity from the Australian Industry Group (AiG) and Commonwealth Bank edged up 1.7 points to 41.0 in the month, but that remained well below the 50 line that separates growth from contraction.

Industry data showed vehicle sales took a turn for the worse in January, falling 18.5 percent compared to a record January last year.

"The question is not what has happened, the question is what's coming," said Mark McInnes, chief executive of department store David Jones, after reporting a 9.2 percent drop in same-store sales in the three months to Jan. 24.

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