Paul McIntyre: Fast-talking PM is left muttering

Westfield's retail baron, Frank Lowy, was rolled out to try to stop what just happened and Prime Minister John Howard hit the airwaves on Thursday morning to stop it happening again.

But by lunch time one would have to conclude all the arguments were falling on deaf ears - and that's what happens when you've got an independent Reserve Bank of Australia (RBA) deciding the direction of interest rates.

On Wednesday, Australia saw its first hike in rates - a 0.25 percentage points rise in the cash rate to 5.5 per cent - since December 2003.

After a cocky election campaign last year in which the Prime Minister spooked punters into the belief the economy - and interest rates, particularly - were unsafe under Labor's management, the Coalition now has some serious tap dancing to do.

Hence Mr Howard muttering over the airwaves on Thursday morning: "What I did say, and I don't apologise for this, is that we will keep interest rates lower than would Labor.

"Interest rates are still low - in recent experience, very low still."

But here's the rub for Mr Howard and the rest of us: the Australian economy, which has outperformed every developed market outside of Ireland in the past decade, slowed to an annual growth rate of 1.4 per cent for 2004 against the Government's budget growth of 3 per cent for 2004-05.

You have to go back to 1992 to get a lower rate than what we saw last year.

It does beg the question - why an interest rate rise?

The RBA has plenty of arguments but the primary one is domestic spending. One of the problems Australia has is that exports are not matching imports - 1.3 per cent growth versus 3.2 per cent in the December quarter and the 13th time in 14 quarters "net exports" have acted as a drag on the economy.

The RBA is also worried about consumer spending levels and credit growth - in March 2001 total household debt was A$415 billion ($447 billion).

Today it's up nearly 80 per cent to $744 billion ($628 billion of that, by the way, is on housing).

Still, Frank Lowy tried awfully hard to counter the consumer-spending-binge view at the RBA before it made the decision to raise rates on Wednesday (some take Westfield's retail sales data as the earliest and most reliable numbers from which to gauge trends in consumer spending).

Certainly the Westfield figures Lowy presented to the RBA appear sobering.

Overall sales rose 6.2 per cent in Westfield shopping centres last year although in the last three months of 2004 it slowed to a 3.4 per cent increase.

A few hours after the RBA rate rise announcement on Wednesday, official retail sales figures from the Australian Bureau of Statistics showed a similar trend - retail sales growth is slowing.

Overall growth was up just 1.4 per cent for the 12 months to December last year - way, way down on the 8.9 per cent increase in 2003 and the lowest growth rate in nearly eight years, outside of the implementation period of the GST in July 2000.

Retail sales, however, did rise in January by 0.6 per cent, the first increase in five months.

It is what appears to be the cooling in consumer spending which had Mr Howard arguing very publicly on Thursday against another rate rise.

"Inflation is low, there is no sign that wages are breaking out," Mr Howard told listeners on Sydney radio station 2GB.

"There's some wages pressure in some areas but there's no sign they're breaking out, and there are signs that the latest growth in the economy has moderated.

"Business investment is still very strong; we have a 30-year low in unemployment. So the economy is still going along very strongly in a real sense.

"So if you put all of those things together, there's a respectable argument that there should not be another rise for a while."

But within hours, Mr Howard's argument was essentially rebuffed by the RBA when Assistant Governor Malcolm Edey told an Australian Industry Group conference it was "very difficult" to make a judgment on the extent to which households are "overstretching" themselves.

"What we do know," he told the manufacturing body, was that "households are more heavily committed than they were previously and demand for borrowing is still strong. Credit growth for households is still growing at 13 per cent.

"It's come down from where it was a year or two ago when it was growing at 20 per cent.

"But the latest figures actually show that the household sector's appetite for credit, if anything, has firmed a bit over the last few months."

On top of that, Dr Edey signalled concern about the "remarkable flatness" in Australia's exports over the past four years, despite "above average" strength in the global economy.

"Domestic demand, on the other hand, grew by 4 per cent over the year and continued at that rate in the December quarter," he said.

"What the figures indicate is that the growth in demand is being met not by commensurate growth in production but to a large extent by growth in imports and by a rundown in inventories."

Simply, that all means we're in for another interest rate hike very soon if Australians don't pull their horns in.

The Prime Minister won't be happy.

Paul McIntyre is a Sydney journalist