Australian Shoppers Spend Freely, Fueling Growth

Australian consumers spent freely for a second straight month in July as strong employment, high consumer confidence and generous tax cuts combined to get the third quarter off to a brisk start.

The Australian dollar edged higher while bonds eased after government data on Friday showed retail sales climbed 0.9% in July to a record A$19.29 billion (US$15.7 billion), handily beating forecasts of a 0.6% increase.

That built on a huge 1.5% rise in June, implying consumption was accelerating again after a pause in April and May.

"These are healthy numbers," said Brian Redican, senior economist at Macquarie Bank. "It looks like retail spending has regained momentum and will add significantly to economic growth this quarter."

Retail sales account for around 23% of GDP and the sector is the biggest single employer with about 15% of all jobs, so such strength spreads right through the economy.

Furthermore, separate data showed the country's trade deficit narrowed by more than expected in July to A$756 million, the smallest in almost a year. Exports rose 2%, in a recovery
from supply delays in June, while imports dropped 3%.

As a result analysts saw a chance trade could add to economic growth this quarter after dragging in the second quarter. "Retail sales are very strong and also we've got a much lower
trade balance, which will obviously contribute to growth as well," said Rob Henderson, chief economist markets at NAB. "You've got exports stronger and imports coming off, so it's all very positive for the outlook for the third quarter."

That was just as well since growth in the second quarter looked to have been quite subdued. Analysts have been forecasting a rise of around 0.6% in gross domestic product (GDP), well down from the first quarter's torrid 1.6% pace. The GDP numbers are out on Sept. 4.

Rate Risk

"It just underlines that the main risk in Australia for rates is still on the upside," said Henderson.

The Reserve Bank of Australia (RBA) hiked its cash rate to a decade high of 6.5% earlier this month and sounded so hawkish at the time that the market priced in another move as early as September.

However, since then the chaos in financial markets has led the market to price out any chance of an early tightening, particularly as many expect the Federal Reserve to cut U.S. rates sometime soon.

"I think if that market turmoil hadn't been around there'd be people talking about when's the next rate hike from the RBA on the back of numbers like this," added Henderson.

The strength in sales in July was led by department stores, recreational goods and another big gain in food retailing. The country's biggest supermarket chain, Woolworths, reported a 27% jump in second-half profit earlier this week even after cutting prices to grab market share.

On Friday, electrical and furniture retailer Harvey Norman reported a 28% jump in profit as consumers stocked up on flat-screen televisions and laptops.

"Worldwide demand for technology and lifestyle products appears to be insatiable," the company said. Consumption has in part been driven by easy access to debt.

Figures from the central bank on Friday showed borrowing by households and firms rose 0.9 percent in July, a solid result given it followed an outsized 1.9% jump in June.

Businesses were again big borrowers, with annual growth in credit up at a torrid 19.4%. That augured well for a continuation of the investment binge seen in the first half of the year.