Flat retail sales signal more rate cuts

FLAT retail sales in the September quarter signal more interest rate cuts are on the way, economists say.

Flat retail sales signal more rate cuts

RETAIL sales in the September quarter were virtually flat, signalling that more interest rate cuts are on the way amid a decline in consumer confidence, economists say.

Australian retail trade in volume terms rose 0.1 per cent in the September quarter in seasonally adjusted terms to $53.104 billion.

Economists had expected a 0.4 per cent recovery, on the heels of a 0.2 per cent fall in the June quarter and a 0.1 per cent decline in the three months to March.

HSBC chief economist John Edwards said the lukewarm retail sales result for the September quarter pointed to a 50 basis point interest rate cut in December.

"I have no doubt there are more rate cuts to come," Dr Edwards said about the existing 5.25 per cent cash rate.

"I certainly see on in December and we're expecting 50 basis points; we're expecting 75 basis points in the first quarter of next year."

Australia's largest economy, New South Wales, suffered a 1.8 per cent decline in retail sales, while the ACT posted a 3 per cent slump.

The rest of the nation was in positive territory.

Dr Edwards said the flat national retail sales result vindicated the Federal Government's $10.4 fiscal stimulus package, which gave handouts to parents, pensioners and first-time home buyers.

"Retail sales have had a bleak experience and we expect that to continue," he said.

"It's essentially flat and it's telling us the the fiscal response by the Federal Government is appropriate and timely.

"It (the fiscal stimulus) would be useful in the fourth quarter."

Dr Edwards said falling consumer sentiment was to blame to the flat retail sales.

"Consumer confidence: there's a lot of hesistancy," he said.

"It's telling us that household consumption is quite weak."

Cafes, restaurants and takeaway food outlets had a 1.8 per cent quarterly decline in sales, making them the hardest hit retail sector.

JPMorgan economist Helen Kevans said weaker labour market conditions and difficulty in getting credit had hit the retail sector.

"The household sector is facing considerable headwinds owing to weaker conditions in the labour market, a reduction in credit availability, low confidence and falling asset prices," she said.

"Of these factors, the largest drag on consumption over the medium term probably will be the significant rise that we forecast in the jobless rate."

Ms Kevans said further interest rate cuts from the Reserve Bank and lower petrol prices would help consumer confidence recover in coming months, even if the economy went into recession.

"On the flipside, although we look for Australia's economy to suffer a shallow recession in coming quarters, consumer spending will be supported by lower petrol prices and significant policy easing from the RBA," she said.

"We expect that RBA officials will push the policy stance decisively into accommodative territory in order to cushion the expected downside for the economy."