Australian Consumers Spend Freely, Rate Rise Looms

Australian consumers went on a shopping spree last quarter, data showed on Tuesday, giving a boost to an already red-hot economy and reinforcing the case for an imminent rise in interest rates.

The upbeat figures came as the Reserve Bank of Australia (RBA) held its first policy meeting of the year, and illustrated just why investors expected a 25 basis-points increase in the cash rate to an 11-year high of 7.0 percent.

"There's a lot of momentum in the economy at the moment and it's just more data supporting the RBA's need to increase interest rates today," said Rob Henderson, chief economist markets at nabCapital.

The central bank announces its decision at 2:30 p.m.. If analysts are right, it will also leave the door open to yet further tightening, a stark contrast to the Federal Reserve as it desperately slashes U.S. rates to head off a recession in the world's biggest economy.

"Consumption was clearly very strong last quarter," said Su-Lin Ong, a senior economist at RBC Capital Markets. "The risk is that they may have to move again. Picking a peak for rates is a pointless exercise."

Retail sales rose 0.5 percent in December from November, when they increased by 0.8 percent. For the fourth quarter as a whole, sales jumped 1.6 percent to an inflation-adjusted A$57.59 billion (US$52.4 billion), easily topping forecasts of a 1.1 percent rise.

That augured well for economic growth in the quarter, given retail sales account for around 23 percent of the country's annual output and the sector is the biggest single employer with about 15 percent of all jobs.

"There was a huge jump in sales volumes for the quarter which we reckon could add 0.4 percentage points to GDP (gross domestic product) all on its own," said RBC's Ong. "That sets Q4 up for brisk GDP growth on top of an already strong Q3."

The economy grew by 4.3 percent in the year to September.

Price Pressures

But such unbridled spending was generating price pressures in an economy short of spare resources after 16 years of uninterrupted growth. Unemployment is near 33-year lows and firms complain endlessly of a lack of skilled labor.

Global demand was pushing food and fuel prices higher, while the cost of home-grown services from health to education were trending higher. Rents were also being squeezed higher by rapid population growth and sluggish home building.

Government data on Tuesday showed approvals to build new homes dived 16 percent in December, with approvals for private houses dropping a sharp 11.6 percent.

"This is bad news for inflation, given rents are a key driving force at the moment," said Scott Haslem, chief economist at UBS.

Meanwhile, Australia's huge resource sector is struggling to meet insatiable demand from China and India even as record global commodity prices deliver a huge windfall to incomes here.

"Obviously the strength of the global economy and the stimulatory impact via commodity prices this had on employment and incomes has contributed significantly," added Haslem. "The issue is whether this strength will be carried into 2008 -- the answer will have a significant impact on whether today's likely hike by the RBA is the peak of the cycle," he added.

With that in mind, it was notable that auto industry figures released on Tuesday showed vehicle sales climbed 4.3 percent in January to a record high. No sign of weakness there.