Odds on Reserve Bank cutting rates

FALTERING recovery and retail slump put pressure on bank to give economy a boost next week.

The Reserve Bank is to decide next week whether or not to raise interest rates / AFP

THE economic recovery is faltering, with financial markets starting to place bets on the Reserve Bank cutting interest rates.

A set of weak retail, building and manufacturing figures released yesterday, along with another heavy fall on the sharemarket guarantee that next week's Reserve Bank board meeting will not raise interest rates further.

Retail sales had been showing signs of recovery in March and April, but rose by 0.2 per cent in May as consumers were spooked by the world market turmoil.

Household goods retailers bore the brunt of the loss of confidence, with their sales slumping by 1.4 per cent in the month.

All other sectors recorded growth in the month, although in most cases this only reversed the declines of previous months. Department stores, for example, achieved a 1 per cent increase, following a 2.3 per cent slump in April.

"Although rate rises have been a clear dampening influence, the main restraint seems to be coming from consumers themselves," said Westpac senior economist Matthew Hassan.

Mr Hassan said that normally you would expect the strong jobs gains, rise in house prices over the past year and relatively low interest rates would be enough to deliver annual retail sales growth of more than 5 per cent.

Instead, the past 12 months has seen growth of only 1.2 per cent - the lowest annual growth since the aftermath of the introduction of the goods and services tax.

Sales rose only in NSW and Victoria, falling in all other states.

New building approvals by local councils slumped in May, dropping by 6.6 per cent following an 11.4 per cent fall in April.

The number of new housing loans being approved by banks has been weak for several months, and the latest falls in new building approvals mean it is now unlikely the housing industry will contribute significantly to economic recovery over the year, as many economists had hoped.

The monthly manufacturing index compiled by the Australian Industry Group shows a weaker trend, dropping 3.4 points to 52.9 points for June, although this shows the industry is still growing.

However, the survey shows new orders were flat in the month.

UBS interest rate strategist Matthew Johnson said an index he compiles based on 55 monthly indicators ranging from bond rates to housing finance and employment, has just moved into negative territory.

"The economy is stalling," Mr Johnson said yesterday.

He noted that the financial markets now expected no rise in interest rates for the next 12 months, and said analysts were starting to consider the possibility of cuts.

Read the full story at The Australian.