Australia Aug data show economy healthy despite rate hike

The latest data released by the Australian Bureau of Statistics (ABS) for August suggest the economy remained upbeat despite an interest rate hike by the central bank at the beginning of the month, economists said. While the data were far from exuberant, they should give the Reserve Bank of Australia enough room to maintain its official cash rate at 6.00 pct, they said. The central bank is holding its monthly monetary policy meeting today and is due to announce its interest rate decision tomorrow at 9.30 am Sydney time (2330 GMT Tuesday). The ABS said retail sales in August rose a seasonally adjusted 0.3 pct from July to 18.1766 bln aud, beating market expectations of a 0.2 pct increase, but slower than the 0.5 pct gain in the previous month. HSBC Australia and New Zealand chief economist John Edwards said while the growth was weaker than his firm's forecast of a 0.5 pct rise, the data showed retail trade remains evidently firm. Compared to a year earlier, retail sales in August were 5.6 pct higher. The largest month-on-month rise was in the "other retailing" category, increasing 2.2 pct. Retail sales of household goods were unchanged while department store sales dropped 7.2 pct. Commonwealth Bank of Australia senior economists noted the large income tax cuts which began on July 1, combined with 122,000 jobs created across the economy in the three months to August, must have offset the high gasoline prices and the RBA's 25-basis point hike in its official cash rate in early August. "The August result bolsters the view that over time consumers have become more used to living with high gasoline prices," they said. ANZ Banking Group senior economist Mark Rodrigues said underlying conditions for retail trade remain solid with domestic demand tracking at a healthy pace and strong growth in employment underpinning household incomes. "The recent decline in petrol (gasoline) prices should also provide some stimulus to household income in coming months. These fundamental factors should see retail sales rebound in coming months, much in the same way that consumer confidence already has," he said. Another data released by the government agency showed total building approvals in August dropped a seasonally adjusted 12.6 pct from July to 12,432 units but were up 2.1 pct year-on-year. The drop was much deeper than the market consensus forecast of a 3.0 pct fall, and followed an 8.3 pct jump in July. Despite the sharp drop, CBA's senior economists said their firm's research indicates there is a mild upswing underway in residential building approvals. "Demand for finance and the gradual rise in net migration indicates, in our view, that residential building construction needs to lift in coming months to avoid further tightening of the residential rental market through 2007," they said. HSBC's Edwards said the overall data were stronger than the headline number suggests given that the huge decline was in multi-unit approvals, down 36.9 pct on the month. "This follows three strong months for apartment approvals, however, and left the trend for that category at a positive 1 pct," he said. Edwards noted that approvals for private houses were up 1.1 pct in August, building on the gain in July and marking the highest level for private sector approvals for over a year. "Looking at these numbers, the RBA would probably conclude that in trend terms both retail trade and building approvals are okay, though not at all exuberant," HSBC's Edwards said. "They do not suggest any reason to tighten, but if the RBA finds it needs to tighten on inflation grounds it would be reasonably confident households and the residential construction industry will not be daunted." ANZ's Rodrigues said the focus of monetary policy in Australia is now well and truly fixed on price pressures rather than demand, reflecting the balance of risks to the economic outlook. "While the RBA is unlikely to move tomorrow, before it gets another read on inflation (due at the end of this month), another rate rise remains on the cards before the end of the year," he said.