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Australia Retail Sales Subdued, Rate Cut Looms

Australian retail sales slipped unexpectedly in December as consumers spent less on food and eating out, a soft end to a subdued quarter for shops and another reason to expect a cut in interest rates this week.

Woman shopping for clothes
Reza Estakhrian | Stone | Getty Images
Woman shopping for clothes

Monday's data showed retail sales slipped 0.1 percent to A$20.9 billion ($22.4 billion), short of forecasts for a rise of 0.2 percent. The report overshadowed figures from ANZ Bank showing a 6 percent jump in job advertisements in January, the largest increase in almost two years.

The Australian dollar dipped briefly on the news while investors continued to look for an easing from the Reserve Bank of Australia (RBA) at its policy meeting on Tuesday.

"On face value this is a very flat result and points to ongoing weakness in the retail sector despite a couple of rate cuts," said Michael Blythe, chief economist at Commonwealth Bank. The RBA trimmed rates by a quarter percentage point in both November and December.

"It also confirms that retail price inflation is practically non-existent, so there's nothing in these numbers stopping the RBA from cutting tomorrow."

Better economic data in the United States and a pick-up in financial markets has led investors to widen the odds of a cut this week to around 50-50. But the vast majority of analysts still expect a move, in large part because inflation has turned far less threatening.

Strong Aussie Caps Inflation

A private gauge of consumer inflation out on Monday showed how the strong Australian dollar drove down the cost of tradable goods and offsetting price pressures in the services sector.

The TD Securities-Melbourne Institute measure of consumer prices rose by 0.2 percent in January, following a 0.5 percent rise in December. The annual pace slowed to 2.2 percent, from 2.4 percent, leaving it well within the RBA's (RBA) long-term target of 2 to 3 percent.

"There is clearly ample justification for the RBA Board to take the next step and shift monetary policy into a more accommodative stance tomorrow by lowering the cash rate," said Annette Beacher, head of Asia Pacific research at TD.

"The very strong Australian dollar only adds weight to the RBA easing sooner rather than later."

The local dollar hit a six-month high on the U.S. dollar on Friday and reached a record peak on the euro in the wake of upbeat U.S. jobs figures.

The impact of the currency was clear in the survey's measure of tradable prices which fell 0.4 percent in January, the fifth drop in six months. That helped offset a 0.6 percent increase in non-tradable prices.

Spending on Services

Discounting was also evident in the retail data with the dollar value of food sales falling a sharp 0.7 percent in December, the biggest drop in over two years.

In contrast spending on clothing and footwear jumped 3.5 percent in the month while sales at department stores increased by 1.1 percent, the best result in months.

Sales for the whole fourth quarter were up only a modest 0.4 percent when adjusted for inflation, extending a run of soft outcomes.

The A$240 billion retail sector accounts for 18 percent of Australia's GDP and is the second-biggest employer after the health industry, with nearly 10 percent of all jobs.

But the retail industry is less important than it once was as a booming mining sector takes over as the driver of economic growth. Spending habits have also changed with consumers shopping more online and favoring services over goods.

The RBA estimates the retail report now covers only around one third of total consumption, down from 40 percent in the 1980s. The impact has been clear in the country's gross domestic product (GDP) figures which have showed household consumption growing far more strongly than suggested by the retail data.

"Consumers are clearly price conscious and that's leading to disinflation in retailing," said Michael Turner, a strategist at RBC Capital Markets. "We're sticking with our call for a cut in interest rates tomorrow."