Australia | May 02 2008
By Chris Shaw
After two months of declines to start the year Australian retail sales rose 0.5% in March, but economists suggest the Reserve Bank of Australia (RBA) is unlikely to view this as a sign of a strengthening economy as the bounce was due entirely to increased food prices.
ANZ bank’s senior economist Katie Dean points out food prices for the month increased by 1.7%, the biggest monthly increase in almost five years, and stripping this figure out TD Securities senior strategist Joshua Williamson notes retail sales actually declined by 0.3%.
According to CommSec equities economist Savanth Sebastian the data provide confirmation consumers in Australia are dealing with the tighter economic conditions by cutting back on spending and budgeting more, especially following the RBA’s most recent increases in interest rates.
As a result Dean expects the short-term trend in retail sales to remain weak, though she notes there is the risk of a reacceleration from July once the Federal Government’s proposed tax cuts come into force. If there are further gains it would put pressure on the RBA to again lift interest rates to fully get inflation out of the system, but for now at least Dean’s view is rates are on hold.
Sebastian agrees, arguing the RBA will wait and see how data in coming months come out before acting again on rates, though the likelihood is one more increase in rates will be required to complete the cycle. Looking further forward Williamson suggests while some upside inflation threats remain by the end of the year it will be clear economic activity is weakening, which will spark the beginning of a rate cutting cycle in Australia.