Retail in reverse as resources power on

Adam Creighton and David Uren
The Australian
May 31, 2012

THE divide between the over-heated, resource-rich sectors of the economy and those stuck in the slow lane has been laid bare by the latest reports on construction and retail sales.

Engineering construction is growing by unheard-of rates of almost 50 per cent a year in Western Australia and 20.7 per cent in Queensland as resource companies assemble their multi-billion-dollar projects.

However, the retail sector, which had hoped that better sales results in March might herald a recovery in consumer spending, slumped again in April. Sales fell in all sectors except for supermarkets and restaurants. Shoppers deserted department stores and household goods retailers.

HSBC chief economist Paul Bloxham said of the latest data: “More evidence today of multi-speed growth, with mining strong and weaker conditions elsewhere.”

The conflicting trends in the economy present the Reserve Bank with a dilemma as it considers whether to cut interest rates again next week.

Financial markets are convinced the Reserve Bank will respond to the weakness in the non-mining economy and the fresh fears for the global economy, cutting rates by at least 25 basis points, with a 75 per cent chance of a second successive 50-basis-point cut.

While engineering construction surged in the resource states, it fell elsewhere in the country.

Building activity, both residential and commercial, is sagging, down 7 per cent over the year.

Residential building is down in all states, indicating there has been little spillover from the resource prosperity to households in Western Australia and Queensland.

Private housing construction is down by 8.8 per cent over the year and weak building approvals show there is little prospect of a revival in coming months.

Households have also been cutting back their spending on renovations, reflecting poor consumer confidence.

Western Australia was the only state where there was an increase in commercial building activity.

The completion of commonwealth government stimulus spending has also depressed non-residential building, with public sector spending down 11.3 per cent.

Although retail spending was weak last month across the country, the annual figures show a big variation, with WA showing 9.5 per cent growth and Queensland 3.5 per cent.

Sales were down by 1.1 per cent in Victoria and were only 2.1 per cent higher in NSW and South Australia.

Citigroup joint chief economist Paul Brennan said he did not expect retail sales to pick up much, despite the federal government’s budget assistance payments to low to middle income earners who were most likely to spend.

“Consumers remain cautious,” Mr Brennan said.

Retail sales had jumped 1.1 per cent in March, holding out hope consumers’ reluctance to spend was waning.

But Deutsche Bank economists said last month’s surprise jump stemmed from the unusually early timing of Easter which skewed the figures. Sales dropped by 0.2 per cent in April.

Mr Bloxham said he did not believe domestic conditions across the economy were yet weak enough to warrant another interest rate cut next week, although the threatening global outlook could prompt a move.

But CommSec chief economist Craig James said: “The Reserve Bank Board must have a rate cut proposal on the agenda at next week’s meeting.”