Retail sales rose 0.2% in October, but building approvals slumped thanks partly to a sharp fall in private residential approvals.
Approvals for private sector houses – crucial for the sector’s overall health – dropped 7.5% in October, seasonally adjusted.
The seasonally adjusted estimate for private sector dwellings excluding houses fell 16.8% following a fall of 31.6% last month.
In retail sales the Australian Bureau of Statistics said food retailing rose 0.4%, household goods retailing was up 0.6%, cafes, restaurants and takeaway food services saw a gain 0.7% but clothing, footwear and personal accessory retailing fell 0.7% and department stores were down 0.5% in the month.
The ABS said retail sales rose in all states with NSW up 0.4%, Western Australia (0.7%), South Australia (0.5%), Victoria (0.1%), Queensland (0.1%), the Northern Territory (0.6%), the Australian Capital Territory (0.4%) and Tasmania (0.3%).
With the third quarter growth data out next Wednesday and the Reserve Bank meeting on Tuesday, the AMP’s chief economist, Dr Shane Oliver says there should be another rate cut.
After the Reserve Bank of Australia’s rate cut a month ago, the general consensus was there was little urgency for the RBA to move again.
The most likely outcome seemed to be that rates would remain on hold until the February meeting at least and the easing cycle would be mild.
A somewhat stronger tone to domestic economic activity releases over the last month would support this.
However, with global uncertainties increasing, our assessment is the RBA should cut again next week and more rate cuts are likely to be required next year.
The past month or so has seen somewhat stronger economic activity releases in Australia.
Consumer sentiment has bounced back from its August low.
Similarly business confidence has also improved.
Housing finance and building approvals appear to be stabilising after earlier falls.
Private credit growth appears to have picked up pace slightly.
Retail sales are up solidly for four months in a row.
After rising to 5.3%, the unemployment rate has fallen back to 5.2%.
And of course, mining related activity remains strong, being the main factor driving a 12.5% surge in construction activity in the September quarter.
Reflecting this, early estimates suggest September quarter
GDP growth (which is due for release on 7 December) could be a solid 1.2% or so.
The case for lower rates
However, while the flow of economic activity indicators in Australia over the last month suggests a pick-up in underlying economic growth, several considerations justify another rate cut now and more next year.
First, the situation in Europe has continued to deteriorate posing an increasing threat to global growth next year.
Europe looks to be back in recession and signs that sovereign debt woes are now affecting core countries such as France, Belgium, the Netherlands and Germany as indicated by higher bond yields are increasing the risks that it will be deep.
With core Euro zone (EZ) countries now being affected and recession deepening there is of course now rising pressure on Europe to take decisive action to deal with the problem.
There is now talk of moving towards a fiscal union, which could supposedly provide cover for the European Central Bank to step up its bond buying in troubled countries, and along with reports of IMF involvement in a loan to Italy so financial markets have seen yet another relief rally over the last day or so.
However, whether things have deteriorated far enough to prompt decisive action – ultimately requiring a commitment to unlimited bond buying and quantitative easing from the ECB – is doubtful.
So the risk is that it may prove to be just another relief rally on the continuing “revolt, response, relief” cycle in Europe.
But key for the RBA is that whereas a mild EZ recession (say a 1% GDP contraction) would still be consistent with 3% or so global GDP growth next year, an EZ blow up – involving a 5 to 10% GDP slump and a related financial crisis would threaten a return to global recession – the risk of which has increased.
Firstly, while Australia has only a small trade exposure to Europe – less than 10% of Australian exports go to the EZ – it’s still vulnerable via the impact on its major trading partners in Asia and via financial and confidence linkages.
Second, and related to this, as the situation in European and hence global credit markets has deteriorated, Australian banks have been warning their funding costs have been increasing.
If this intensifies, then there is a risk that banks may actually increase their lending rates – both business rates and mortgage rates – independently of the RBA.
Such a move would result in a tightening in monetary conditions at the worst possible time.
The best way to prevent it from occurring in the short term would be for the RBA to reduce its cash rate.
Third, it would be dangerous to read too much into the recent improvement in economic activity
