Australians kept shopping last quarter as government hand-outs and falling interest rates boosted spending power, perhaps just enough to save the economy from an outright contraction. Retail sales adjusted for inflation rose 0.8 percent in the fourth quarter to A$53.5 billion ($34.1 billion), the biggest increase in a year, government data showed on Wednesday.
That was short of market forecasts of a 1.1 percent increase because prices, notably for food, rose more than expected. But with retail sales making up around a quarter of gross domestic product (GDP), it still suggested household consumption made a vital contribution to growth last quarter. "Gross domestic product may be positive because consumption makes up such a big part," said Paul Brennan, head of market economics at Citi.
The GDP report is due on March 4 and may well show the economy barely grew for a second straight quarter. That would be a relatively solid performance given many developed countries suffered severe contractions last quarter, but would still keep the onus on the Reserve Bank of Australia (RBA) to cut rates. "The global outlook is so terrible, we're sticking with the view that they'll cut by 50 basis points at the March meeting," said Brennan.
Investors are of the same mind, with interbank futures wagering the central bank will cut its 3.25 percent cash rate to at least 2.75 percent when it next meets on March 3. Ten-year bond futures boasted their biggest daily gains in five months as a rash of dire world economic data and worries about the health of Europe's banking system sent investors stampeding to the safety of sovereign debt.
BRAVE FACE Officials at the central bank tried to put a brave face on the situation. RBA Assistant Governor Malcolm Edey on Wednesday was hopeful Australia would fare better than many other developed countries, thanks in part to aggressive monetary and fiscal stimulus.
In just six months the central bank has cut its key cash rate by 4 percentage points to a record low, by far the most aggressive easing since the recession of the early 1990s. Australia's Labour government also weighed in this month with a fiscal stimulus package of A$42 billion ($27 billion) in infrastructure spending and income support, on top of A$10.4 billion of pump priming late last year. One key difference was that Australia's financial system remained in much better shape than those abroad, said Edey.
"As a result of that, we have been able to gain much more traction from cuts in official interest rates," he said. In particular, mortgage rates in Australia had fallen by almost the full 400 basis points since September, a marked contrast with many other countries,
Australia's second-largest bank, Westpac, on Wednesday reported a slight dip in profit to A$1.2 billion for its first quarter despite a jump in bad debt charges, underlining the industry's resilience to the global crisis.
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