Poor retail sales build the case for another cut

The likelihood that the Reserve Bank will make at least a 25 basis point cut when it meets next Tuesday increased sharply this week.

Data out from the Australian Bureau of Statistics on retail sales on Wednesday revealed a sharp fall in retail turnover during February, with sales dropping 2 per cent. The market had only been expecting a fall of 0.5 per cent. Retail sales during December and January were boosted by the federal government’s $8.7 billion handouts, but retailers in February were hit as consumers tightened their belts and reined in their spending.

This slump in sales represents the biggest fall in Australia in more than eight years. It shows just how nervous consumers are about the long-term security of their jobs as the global economic slowdown continues to bite hard.

While the weak figures support the case for another cut, not all market commentators are in agreement that the RBA will act next Tuesday. Some are arguing that the RBA will continue to sit tight, because they believe that the central bank needs to see further evidence of how the economy is responding to the federal government’s stimulus measures implemented to date. There is quite a time lag associated with any adjustments in monetary policy and too many changes without assessing the results can be dangerous.

The Organisation for Economic Co-operation and Development released some bleak news for the outlook for the global economy this week. It has forecast that the US, Europe and Japan are likely to contract by 4 to 7 per cent this year.

Although there are reports that the federal Treasury Department is preparing a third economic stimulus package in next month’s budget, it seems clear that Australia will find it increasingly difficult to stay immune from the worst of the global downturn.

In a speech this week Reserve Bank Deputy Governor Ric Battellino admitted as much. He said: "While the Australian economy has also weakened, it has held up better than most during this difficult period, helped by earlier disciplined policies and prudent financial behaviour. However, there are limits on how much we can insulate ourselves from what is happening abroad, and therefore there are probably still some difficult times ahead."

It looks like the Reserve Bank is bracing itself for much more pain ahead. Growth is forecast to be negative in Australia in 2009 and unemployment is set to soar as the economy continues to slow. This means that the bank is likely to hold off cutting rates as long as possible so that when the cut is made, it’s large enough to make a difference when it’s most needed.

Infochoice.com.au