Australia Retail Growth Slows After Spending Spree

Australian retail sales rose less than forecast in October as consumers cut back on household goods purchases after months of heavy spending, reinforcing expectations the central bank will keep rates on hold this week.

Tuesday's figures from the government showed retail sales rose 0.2 percent to A$19.88 billion (US$17.4 billion), short of forecasts of a 0.6 percent rise, although analysts remained upbeat on the outlook for consumption.

The Australian dollar dipped and bonds firmed on the data, which came as the Reserve Bank of Australia (RBA) board held its monthly rate setting meeting in Sydney.

The central bank has already raised rates twice since August, taking them to an 11-year peak of 6.75 percent, in an effort to cool the economy. Not a single analyst in a Reuters poll thought they would tighten again this month given the squeeze in global credit markets has clouded the outlook for world growth.

"The sales data coupled with the intensified global turmoil will see the RBA deliver a steady rate decision tomorrow," said Su-Lin Ong, senior economist at RBC Capital Markets.

The RBA will announce its decision on rates at 9:30 a.m. local time Wednesday.

Still, analysts noted retail sales were up a healthy 7.4 percent on last year, while low unemployment and rising household wealth meant the fundamentals for consumption remained solid.

"The fact that sales were weaker doesn't ring any alarm bells as yet," said Adam Carr, a senior economist at UBS. "The softer result follows four months of strong growth averaging 1 percent -- so in that context the trend in spending is still good."

He noted the softness in October was concentrated in household goods and food, but consumers were quite happy to spend on discretionary items. Sales of recreational goods like toys and computer games, jumped a record 7 percent in the month while sales of clothing increased by 2.7 percent.

"The consumer has been a key driver of economic growth over the last couple of quarters and is expected to be so again," concluded Carr.

Speedy Growth

Figures on gross domestic product (GDP) due on Wednesday are expected to show the economy grew a brisk 1.0 percent in the three months to end September, thanks chiefly to a surge in consumer spending.

Growth for the year should accelerate to 4.8 percent, from 4.3 percent in the second quarter. That would be the economy's best performance in eight years, but also well above a level the central bank believes is sustainable in the long run.

Higher rates have had some impact on residential construction, with approvals to build new homes falling 2.8 percent in October.

Yet, mining and infrastructure construction is booming and analysts reckon annual growth in domestic demand could have hit a heady 6 percent last quarter.

"The resilience of households and businesses has been a standout feature of the Australian economy for some time now despite cash rates at a decade high and a doubling in household debt over the last five years," said RBC's Ong.

That was one reason financial markets were still pricing in at least one more hike in rates for next year, though much will depend on whether the current strains in global credit markets really do take a toll on world growth.