Flat retail sales ease interest rate fears

SYDNEY - Australian retail sales were flat in July after two months of strong growth, suggesting consumer demand was not about to threaten the official interest rate outlook.

The country's trade deficit also widened slightly in July as import growth outstripped exports despite a boom in commodity prices, a separate report showed yesterday.

Analysts described both reports as slightly disappointing but well in line with the Reserve Bank of Australia's prediction that domestic demand would ease.

"These figures were entirely consistent with the RBA's reading on the economy and with the outlook for steady monetary policy," said Rob Henderson, chief economist markets at National Australia Bank.

"The sales numbers confirm consumers are still wary, particularly as rising petrol prices eat into spending power," he added. Petrol is not counted in retail sales.

The flat outcome for July retail sales compared with market forecasts of a 0.3 per cent rise and came after gains of 1.1 per cent in both May and June.

Food retailing was the only sector to show any growth, while shoppers spent less on clothes and recreation and in department stores. The drop in values could have been due in part to heavy discounting as retailers faced intense competition for customers.

Higher petrol prices also played a part in widening Australia's international trade deficit to A$1.46 billion ($1.59 billion) in July, from a revised A$1.4 billion shortfall in June.

The deficit was a let-down to many, given the boom in global commodity prices.

Huge increases in contract prices for some commodities, such as coking coal, helped narrow the deficit by almost a billion dollars back in April but the improvement since has been much more pedestrian. The value of exports rose 2 per cent in July, but imports were up 3 per cent.

"While prices have gone up, the actual volume of commodity exports has yet to really rise," said NAB's Henderson. "But we expect volumes will pick up as the year progresses and increased investment in mining capacity bears fruit."

Japan remained Australia's biggest trading partner, while China pulled past the United States to claim second spot.

- REUTERS