Australian retail sales higher than expected

Australian retail sales rose more than expected in July, confirming the economy had gathered momentum before this month's increase in interest rates and adding to the risk of another tightening.

Government data yesterday showed sales rose 0.6 per cent in July from the previous month, beating expectations of a 0.5 per cent rise and after June's hefty 0.9 per cent increase.

Other figures showed the value of construction work done in the second quarter climbed 3.6 per cent to a record high.

"Continuing solid data points to the economy growing at 3 per cent plus, and probably picking up a bit of speed, and it underlines the fact that inflation and interest rates remain firmly skewed to the upside," said John Peters, senior economist at Commonwealth Bank.

The Reserve Bank of Australia raised its key cash rate to 6 per cent this month in an attempt to rein in an unexpected acceleration in inflation.

The central bank's previous rate rise in May had almost no impact on spending, though the latest tightening seemed to hit harder, with one survey of consumer confidence recording its second largest monthly fall on record.

Still, outgoing RBA Governor Ian Macfarlane has made it clear that another tightening was more likely than not given the upward risks to inflation after 15 years of ceaseless economic growth.

Financial markets showed little reaction to the data and interbank bill futures still show around a 60 per cent chance of a rise to 6.25 per cent by year-end.

Retail sales totalled A$18.14 billion ($21.8 billion) for the month, with a 7 per cent jump in sales at department stores the main driver.

Retail sales account for around 23 per cent of GDP and the sector is the biggest single employer with about 15 per cent of the workforce.

Petrol prices were near record highs in the month, perhaps leaving consumers with less money to spend on other things. Petrol is not included in the retail sales data.

But sizeable cuts in personal taxes took effect from the start of July while the jobless rate hit a 30-year low of 4.8 per cent, pointing to underlying resilience in incomes.

"Tax cuts may have helped, though we think the more important factor is the strength of the labour market, which gives consumers the confidence to keep spending," said Su-Lin Ong, senior economist at RBC Capital Markets.

"Theory suggests the headwinds from higher mortgage payments and petrol prices will have some effect in the second half of the year - but if employment stays strong, who knows?" The total value of all construction work completed in Australia in the second quarter climbed to a record A$25.6 billion in inflation-adjusted dollars. Business and infrastructure investment, particularly in the booming commodity sector, again led the way with engineering spending up 20 per cent on the same quarter last year.

Even home building made a comeback, rising 2.7 per cent by value in the quarter after a string of falls.

That strength should add to the GDP, figures for which are due next week. Analysts have been looking for growth of around 0.8 per cent in the quarter.

"It's very positive for the investment component of GDP. So there is probably a bit of an upside risk to the GDP numbers," said Stephen Walters, chief economist at JPMorgan.

- REUTERS