Australia's shoppers, builders feel bite from rates

SYDNEY: Australia's retail sales grew at a pedestrian pace in May, while approvals to build new homes fell sharply for a second month, adding to investor expectations that interest rates would stay on hold this month, if not for longer.

The Australian dollar slipped to three-week lows after government figures showed retail sales rose a minor 0.2% in May, a slowdown from April's 0.6% gain. Sales for the year were up just 1.2%, the slowest in almost two decades.

Approvals to build new homes dropped a surprisingly sharp 6.6% in May, on top of a 11.4% fall in April, a disappointment to the Reserve Bank of Australia (RBA), which has been calling for more homes to be built to meet rising demand.

The central bank holds its monthly meeting on July 6 and is widely expected to keep rates at 4.5% after hiking six times since October.

"The data we're getting tell us that rate hikes are working their way through the economy and are starting to bite," said Su-Lin Ong, a senior economist at RBC Capital Markets.

"That, coupled with a very uncertain global backdrop, downside risk to global growth and increasing concerns about China, means this pause may continue longer than any of us were thinking." Indeed, data out of China earlier on Thursday showed a slowing manufacturing growth, which pressured stocks across the Asia Pacific and knocked half a cent off the Australian dollar.

The futures market reacted by adding to bets that the next move in interest rates could actually be downwards, with the December interbank contract implying around a one-in-three chance of a cut by Christmas.

Most analysts seriously doubt the RBA would cut with inflation at the top of its 2% to 3% target band and unemployment down at 5.2%, but it could well stand pat for some time.

"Investors are guessing - probably correctly - that growing strains in global debt and equity markets, heightened fears of a "double dip" recession in Europe and the US, and mixed economic news on the domestic front, will push any tightening into 2011," said Rory Robertson, interest rate strategist at Macquarie.

Spending less, saving more

Anecdotal evidence from retailers had already pointed to softness in May as widespread discounting failed to draw demand.

That was a drag for the economy as retail accounts for around 23% of GDP and is the second biggest employer with about 11% of all jobs.

The RBA has noted that consumers are more cautious in their spending than in past recoveries, with memories of the financial crisis leading them to save more instead.

Yet the central bank has also welcomed this new-found sobriety, arguing it would help offset the inflationary impact of the booming terms of trade.

"These sorts of trends would surely increase the medium-term resilience of household finances and accommodate the resource boom and the rise in other forms of investment with less pressure on labour markets and prices than otherwise," was the verdict of RBA Governor Glenn Stevens in a recent speech.

He would likely not be as sanguine about the pullback in home building, having repeatedly warned that more supply was needed to take the heat out of house prices. Instead, approvals to build new homes were at a seven-month low in May, though still up 27% on the same month last year.

"The data is showing weakness more rapidly than we'd anticipated and suggest downside risks to our target of 175,000 starts this year," said Scott Haslem, chief economist at UBS.

"Still, the ongoing improvement in employment, wages and hours-worked should deliver a better second half performance for the private sector," he added. -- Reuters