Aussie News 30 June 2005

The start of the financial year began with a slew of better than expected data on the Australian economy this morning.

Retail trade surprised on the upside, rising by a strong 0.9% in May ahead of market expectations of 0.4% and a fall of 0.5% in April. Lower petrol prices in the month, "good-feel" spending, spurred by the impending tax cuts and more generous family payments announced in the May budget, and the early start to the mid-year clearance sales helped to boost sales. All sectors except food, recreational and other retailing posted positive growth in May. Department store and clothing sales recovered strongly in May, after falling sharply in April, as aggressive discounting appeared to prompt strong volume turnover.

The housing market was the other sector to deliver an upside surprise with building approvals rising by 4.5% in the month of May, above median expectations for a flat result. The rise was driven by a sharp 5% increase in building approvals for houses, with approvals for 'other' dwellings ticking up by 1%. This is the second consecutive monthly rise in building approvals.

Implications: The rebound in retail sales shows that, while spending has clearly slowed from last year's heady pace, the Australian consumer is not yet dead. Our expectations for a slight pick up in retail sales over the second half of this year, partly due to the impact on income tax cuts (which come into effect today), remains in tact. Meanwhile the second consecutive monthly rise in building approvals provides some tentative evidence that the market has bottomed, notwithstanding the prospect of a renewed fall in activity once the full effect of the March interest rate rise comes through the market. In other words, today's data supports the view that housing still looks on track for a soft landing.

As for monetary policy, today's upbeat data does little to add to the case for further tightening, but importantly it also suggests that any rate cut is still some time away. Banks continue to expect rates will remain on hold over the rest of 2005.