Did the Australian economy hit a pothole in January? The retail sales figures for the month suggest it may have after consumer confidence fell sharply in the month and continued falling in February.

I know it’s only one month and it’s very dangerous to extrapolate on that but with retail sales showing no growth whatsoever in seasonally adjusted terms, compared to a 0.5% growth estimate from the market, the question needs to be posed. That’s a question the Reserve Bank board will no doubt be asking today.

It’s also a question some economists, most notably Dr Shane Oliver, the AMP’s head of Strategy have been asking when they wonder if the RBA could be going too far in attacking inflation so aggressively. He believes there’s a danger of tipping the economy into recession with too aggressive a campaign of rate increases and the retail sales figures will add to that point.

The Australian Bureau of Statistics also cut the 0.5% estimate for growth in December to 0.4% and also cut the November estimate to 0.5%. The original estimate for November was a rise of 0.8%, so there has now been a very noticeable slowing in retail sales in the last three months to the end of January when they stalled.

The savage share sell-off in January, rising interest rates from the banks and then the RBA decision on February 5 and the second round of rate rises knocked consumer and business confidence lower according to surveys from the Melbourne Institute/Westpac and the National Australia Bank.

The downgrading of retail sales might mean that fourth quarter gross domestic product growth might be weaker than previously thought. Market estimates are for a growth of 0.7% or 0.8% for an annual rate of 3.8% to around 4%. But the revisions to retail sales means that could be a touch lower, as does a larger than forecast impact from our external account.

Instead of the balance of payments deficit cutting between 0.5% and 0.7% off growth in the quarter (according to most market forecasts) the ABS said today that the higher than expected deficit would cut 1% from GDP. With inventories trimming an estimated 0.2% from GDP, the figure could be 0.5% or less, which would represent a significant slowing. But the figure the RBA will focus on is growth in domestic non-farm GDP.

Despite the fall in seasonally adjusted terms, the original figures issued by the ABS show that retail sales in January were 8.1% higher than in January 2007, while in December they were 7.6% higher than in the same month of 2007. Much of that reflects the strong rise in sales in the first half of 2007.

In all the talk about higher interest rates and mortgage stress, everyone forgets that the country as a whole is under considerable stress from a debt burden that just won’t stop growing.

Peter Fray

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