SYDNEY, Apr 24: Australia’s economy looks like it grew at a rapid clip last quarter thanks to a potent mix of tame inflation and rousing retail sales, a sign low interest rates are doing their job and further easing might not be warranted.
While markets on Wednesday reacted to a surprisingly subdued reading for inflation by shortening the odds on another cut in rates, that missed the implications that falling goods prices had for spending power.
‘The data showed extraordinary levels of discounting in some goods,’ said Michael Blythe, chief economist at Commonwealth Bank of Australia.
‘That in turn suggests that the very strong growth in retail sales seen so far this year was driven by volumes not prices,’ he added. ‘If so, it means real consumption was also likely strong and we could be looking at economic growth of 1 percent or more for first quarter alone.’
Such an outcome would be a sizable step up from the 0.6 percent growth recorded for the fourth quarter of last year and well above what most analysts have been tipping.
Even the thought of such an upbeat outcome would make it a lot less likely the Reserve Bank of Australia (RBA) will cut interest rates again at its next policy meeting on May 7.
The central bank took rates to record-matching lows of 3 percent late last year to help support domestic demand, and that is exactly what is happening.
Retail sales surged by 2.5 percent over January and February, the strongest start to a year in over a decade. Figures for March are not due out until May 6 but anecdotal evidence from retailers suggests another solid outcome.
That was already seen as a major positive for growth given the A$260 billion retail sector accounts for 17 percent of Australia’s A$1.5 trillion in annual gross domestic product (GDP).
But the news is even better for real, or inflation-adjusted, GDP as prices for everything from furniture to computers fell in the first quarter.
Figures from the Australian Bureau of Statistics out on Wednesday showed prices for audio and visual and computing gear dropped 4.7 percent in the quarter, furniture fell 6.8 percent, clothing 3.8 percent and household appliances 2.5 percent.
‘The falls in clothing and consumer durables prices were some of the biggest on record,’ noted Blythe.
The downward trend owes much to the high Australian dollar which has been pushing down import prices while also generating ever-more fierce competition between retailers.
That in turn was a major reason that the overall consumer price index (CPI) rose by a smaller-than-expected 0.4 percent in the first quarter.
(AGENCIES)
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