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SYDNEY - Australian consumers spent up a storm in the first quarter of the year, boosting growth across the economy and keeping upward pressure on inflation and interest rates in the long run.
Government figures out yesterday showed retail sales jumped 1.1 per cent in March, twice what the market expected and taking gains for the entire first quarter to a thumping 2 per cent when adjusted for inflation.
That was the strongest quarter since late 2003 and sent the Australian dollar up a third of a US cent, while damaging bonds as the market priced in a greater chance of higher interest rates, albeit not for some months to come.
"For the moment, it's economic nirvana with strong growth and low inflation," said Adam Carr, a senior economist at UBS. "But spending like this is bound to add to inflation in the longer run and keep alive the risk of higher rates going into next year."
Last week, the Reserve Bank acknowledged that inflation had slowed by more than expected and trimmed its inflation forecast for 2007, leading financial markets to slash the risks of another rate rise this year.
Yet the central bank also cautioned that strong domestic demand and a drum-tight labour market were likely to see inflation creep higher again in 2008.
Retail sales account for almost a quarter of the economy and the sector is the biggest single employer with about 15 per cent of all jobs.
The 2 per cent jump in real sales to A$54.3 billion ($61.5 billion) in the first quarter promises to add around 0.5 percentage points to growth all on its own.
Combined with very strong demand for vehicles in the quarter, consumption as a whole could contribute at least 1 percentage point to gross domestic product (GDP).
"This points to GDP growth of at least 1 per cent for the quarter, so its relatively robust," said Stephen Halmarick, co-head of market economics at Citigroup. That would come on top of 1 per cent GDP growth in the fourth quarter of last year.
"Consumers appear to be very comfortable in accelerating their spending," said Halmarick.
Strong jobs growth and an unemployment rate at 31-year lows supported incomes and confidence, helping counter pressure from higher borrowing costs after three rate rises last year.
Real spending in the first quarter was also flattered by falling prices for many imported consumer products such as flat screen TVs, computers and household goods from China and Japan.
That trend probably continued this quarter helped by the strength of the Australian dollar, which climbed to 22-year highs against a basket of major currencies last month.
Other data out showed approvals to build new homes slid 11.4 per cent in March, but that merely corrected a sharp jump in February and reflected wild swings in the multi-unit sector.
- REUTERS
