Australian retail sales took their biggest fall in six years in June, stirring fears the economy was slowing far more rapidly than policy-makers had planned and fanning talk of early cuts in interest rates.
The Australian dollar slipped after figures from the government showed retail sales slid 1.0 percent in June, a shock for analysts who had looked for a rise of around 0.2 percent.
That was the biggest fall since June 2002 and dragged sales for the entire second quarter down by a steep 0.6 percent, the largest drop in almost eight years.
Other data out on Thursday showed borrowing by households and businesses continued to slow markedly in the face of high interest rates and a credit squeeze.
The disturbing weakness in demand overshadowed a major improvement in the country's trade performance and led markets to price in a cut in the 7.25 percent cash rate by Christmas.
"It's pretty clear that the combination of high interest rates and weakness in markets and higher petrol prices are slowing the demand side of the economy quite rapidly," said Stephen Halmarick, co-head of market economics at Citi.
"I think the run of data probably increases the odds that the first easing will be before the end of this year rather than early next year," he concluded. The Reserve Bank of Australia (RBA) has raised rates four times in the past year to slow demand and restrain core inflation, which ran at a 17-year peak last quarter.
Going by the sales data, it was succeeding all too well. June saw steep falls in discretionary areas of spending like clothes, recreational goods and at department stores.
The drop in quarterly sales when adjusted for inflation augured ill for economic growth in the quarter. Retail sales account for around 23 percent of gross domestic product (GDP) and the sector is the biggest single employer with about 15 percent of all jobs.
"Every piece of data relating to domestic spending was weak. It is pointing towards a relatively soft GDP reading for the second quarter," said Stephen Roberts, research director at Lehman Brothers. "So the Reserve Bank's next move is more likely to be a rate cut."
The deadening hand of high interest rates was underlined by credit figures showing a rise of just 0.4 percent in June, while personal borrowing on credit cards and such fell by 0.4 percent.
Annual growth in housing credit slowed to 9.9 percent, the lowest in 21 years and down from a peak of 14.6 percent.
That turnaround owes much to the global credit squeeze which has prompted local banks to raise mortgage by more than 140 basis points in the past year to around 9.5 percent as they seek to recoup increased funding costs. Banks have also toughened lending standards, while non-bank lenders have cut back sharply.
"High interest rates and low consumer confidence, which has dived to recession-like levels, clearly are major drags on housing and personal credit growth," said Stephen Walters, chief economist at JPMorgan. "The risk of a rate cut by the RBA this year has risen," added Walters,
though he noted the ongoing boom in Australia's mining sector might delay a move.
The extent of that boom was highlighted by trade figures which showed the country ran a trade surplus of A$411 million ($387 million) in June, well above the A$50 million expected thanks to huge price rises for coal and iron ore, Australia's two biggest exports.
May's deficit was also revised sharply lower and, combined with a surplus in April, marked a huge turnaround from early in the year when the monthly deficit was running at a record A$3 billion.
The resulting boost to the terms of trade -- what Australia gets for exports compared with what it pays for imports -- should deliver a rich windfall to profits, incomes and tax receipts.
"It quite clearly highlights one of the key themes for the Australian economy over the coming year," said Scott Haslem, chief economist at UBS. "The interest-sensitive consumer and housing sectors are moderating, while the trade data is improving sharply on the back of recent coal and iron ore prices," he noted.
How these forces played out in the next couple of months would decide whether the RBA cut rates by Christmas, or waited for the new year, said Haslem.