Rates likely to stay on hold amid uncertainty

Mixed reports about the state of the Australian economy serve as a reminder that while the government’s stimulus package has had some results, the battle is far from won.

On the plus side, retail sales in May far exceeded economists` expectations, rising by 1 per cent, instead of by 0.5 per cent as expected. Figures from the Australian Bureau of Statistics show department stores in particular clocked up strong figures, reporting a 5.5 per cent increase in sales from April, while clothing and soft good retailing was up by 2.9 per cent. This is good news for the economy, as strong retail activity will help to buttress our economy against recession.

Meanwhile, while manufacturing activity in Australia remains weak, the pace at which the industry is declining has slowed in June. The Australian PMI index, which monitors manufacturing activity across Australia, rose 0.9 per cent from May to 38.4. While this is the industry’s thirteenth consecutive month of contraction, the index is moving closer to the 50 points level which separates contraction from expansion.

However, hopes for a speedy recovery were dampened this week by news that the housing sector hit a wall in May. An industry survey shows building approvals tumbled by 12.5 per cent from April, while new home sales decreased by 5.7 per cent. New South Wales was hardest hit, where residential dwelling approvals decreased by 25.6 per cent, while detached new home sales dropped by 9.9 per cent. This came as a shock to economists, who had been predicting a rise in building approvals. The drop in demand for housing is a reminder that we cannot rely on the first home buyers` boost alone to bring about economic recovery.

At the same time, skilled job vacancies fell by 3.7 per cent for the month of June, according to data from the Department of Education, Employment and Workplace Relations. Rising unemployment represents the most urgent threat to consumer confidence and consumer spending, and it could have a further negative effect on demand for housing.

Key indicators like unemployment and consumer confidence levels are critical to the health of the Australian economy. The results this week show that while the government’s stimulus measures and lower interest rates are having some effect on the Australian economy, its recovery remains on shaky grounds. Such mixed results mean it is highly likely that the Reserve Bank will continue its easing bias by keeping the official cash rate at 3 per cent when it meets next week. However, should the economy start to deteriorate more rapidly, the Reserve Bank still has some flexibility to make another cut in rates.

Infochoice.com.au