Poor Retail Sales A Cloud Over Economy's Outlook For The Year

Sydney Morning Herald

Saturday January 14, 2006

Jessica Irvine

FALLING retail sales, a monster trade deficit and measly job creation have marked an inauspicious start to the year for the Australian economy.

Embattled retailers were not surprised to hear on Monday that retail sales contracted 0.1 per cent in November.

"The soggy retail sales really set the tone for the week," Citigroup economist Annette Beacher said.

"Just when we've finished digesting the poor consumer spend, we're reminded that the trade balance is in dire straits."

Australia's trade deficit with the rest of the world blew out to a monster $2.5 billion in November, the Bureau of Statistics announced on Tuesday.

While changes to Customs' cargo management system were initially blamed for the blowout, the bureau took the rare step of issuing a statement to defend the number.

After that, job figures released on Thursday showed just 2000 jobs were created in December, while unemployment remained steady at 5.1 per cent.

But for those who like their interest rates stable, last week's figures indicate it is going to be another good year.

"Our view is the Reserve Bank of Australia is going to do nothing," said JPMorgan's chief economist, Stephen Walters.

"That's what the jobs figures are screaming to me."

The Australian dollar, which withstood the onslaught of poor economic readings to close the week stronger at US75.13c, would take a battering later in the year, Mr Walters predicted.

"We think the Aussie will end the year below US70c," he said.

Rising US interest rates, slowing commodity price gains, weaker economic growth compared to the US and a "howler" of a current account deficit would all take their toll, he said.

But Citigroup's Ms Beacher said that currency markets had been concentrating on offshore developments.

"All week it's really been, except for the trade balance, an absolute hostage to US dollar ruminations," Ms Beacher said.

The US dollar got a boost on Friday from a smaller than expected US trade deficit - $US64 billion ($85 billion) for November - and tame comments from the president of the European Central Bank, Jean-Claude Trichet, on the future of European interest rate rises.

The dollar is set to continue to drift following offshore movements next week, with the Australian economic cupboard all but bare except for housing finance figures.

© 2006 Sydney Morning Herald

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