Australia Retail Sales Jump, Building Slumps

Australian retail sales jumped by 1.0 percent in May, twice the market forecast, as government give-aways and historically low borrowing costs fuelled spending at department stores and cafes.

AP

However, other data on Wednesday showed a shock 12.5 percent drop in approvals to build new homes in May, as the volatile multi-unit sector slumped 43.6 percent to the lowest since 1987.

The mixed news only added to expectations the Reserve Bank of Australia (RBA) would leave rates unchanged at 3.0 percent at its July policy meeting next week.

"For the RBA, overall it adds to the view that the economy's not really in any need of extra policy assistance right now," said Michael Blythe, chief economist at Commonwealth Bank. "But if those approval numbers are telling us something then it's also an indication they won't be thinking about rate rises any time soon," he added.

The market seemed to agree, nudging bill futures higher while leaving the Australian dollar steady around $0.8050 .

The rise in retail sales was double the 0.5 percent forecast and at a record A$19.55 billion ($15.8 billion), sales were a rousing 7.1 percent up on May last year.

Retail sales account for around 23 percent of Australia's GDP and the sector is the biggest employer with about 15 percent of all jobs.

Department stores led the way in May boasting a 5.5 percent jump in sales, while clothing rose 2.9 percent and restaurants and cafes saw a 1.4 percent increase.

One beneficiary was department store chain David Jones which on Tuesday raised its profit forecast for the year to end June, predicting growth of 20 to 30 percent thanks to better sales in May and, tellingly, for June as well.

Fiscal Candy

Sales have been wildly distorted by government hand-outs in recent months, and there are more tax cuts coming in July. The RBA's aggressive rate-cutting campaign has also sharply lowered interest costs.

"Sales were clearly helped by all this stimulus," said Su-Lin Ong, a senior economist at RBC Capital Markets. "The test will be when the fiscal candy runs out later in the year."

Government largesse has also played a part in a rebound in the housing market as generous grants for first-time buyers boosted sales and mortgage demand.

Which was why the 12.5 percent drop in approvals to build homes came as such a shock. Most of the weakness was concentrated in the multi-unit sector which is notoriously volatile.

"Maybe some apartment approvals got pulled for lack of financing, but it's not clear," said Ong at RBC. "Core private houses approvals dipped but are still trending higher, so I'm reluctant to read too much into one month's figures."

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Other data released on Wednesday showed activity in Australia's hard-hit manufacturing sector was slowly improving.

The Australian Industry Group/PriceWaterhouseCoopers Performance of Manufacturing Index (PMI) rose 0.9 points to 38.4 in June. That was the highest reading in eight months, but still
well below the 50 threshold separating growth from contraction.

The survey did show a tentative improvement in employment, with that at a five-month high. Manufacturing has been one of the weakest areas of an otherwise resilient labor market.

"Clearly government stimulus, lower interest rates and strengthening confidence have benefited some sectors," said Ai Group Chief Executive Heather Ridout.

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