According to the Reserve Bank, the economy may be sliding into recession and some economists are saying we shouldn’t expect an interest rate cut next week. Figures out today showing a steeper than expected fall in retail sales in February may force a revision in those ideas, as could falls in manufacturing and several other bits of data.

The RBA board sat on its hands in March and didn’t cut the cash rate: next Tuesday in Brisbane it meets for April.

The data flow has turned sour since that March meeting and those hints of “green shoots” have started browning off. Retail sales and housing are weak as the December stimulus disappears. Tomorrow we find out how strong the trade account is. Forecasts are for another large surplus as imports are cut by the slumping domestic economy.

The February credit figures from the Reserve Bank yesterday were flat with business lending down a long with some personal spending: only private owner occupied housing was strong.

But this morning we discovered a sharp fall in retail sales in February, down 2%, seasonally adjusted. It was much deeper than the market expected, while the 7.8% rise in building approvals was OK on the surface, it was again distorted by a lumpy rise in approvals for non-private dwellings. Together with another contractionary month for manufacturing, another cut in steel production from OneSteel, the number two producer and a sharp fall in skilled job vacancies for March, the picture is of an economy stumbling lower.

The RBA may want to wait another month to see what happens, but it’s clear the December stimulation is exhausting itself, the 4% cut in interest rates isn’t dragging people into big new spending commitments or helping business borrow. Even if there’s still some growth in private dwelling approvals, that’s the first home buyers grant at work, not underlying demand or just the big rate cuts.

Private dwelling approvals however are not up that much at all: in fact they were still down 23% in February from the same month of last year.

The fall in retail sales was much deeper than the 0.5% cut drop forecast by the market.

But the January rise of 0.2% was upgraded to a rise of 0.5% in the latest figures. That followed the now 3.8% surge in December retail sales (originally 2%), suggesting there is still some strength there, but it is fading fast.

The ABS in its release this morning that the fall was uniform: across all sectors of retailing and most of the country, bar Tasmania. Not even food was spared.

“In seasonally adjusted terms, “all industries had a decrease in February 2009 – Food retailing (-0.4%), Department stores (-9.8%), Clothing and soft good retailing (-2.7%), Household good retailing (-3.8%), Other retailing (-0.3%) and Cafes, restaurants and takeaway food services (-1.3%).”

And apart from a rise of 1.3% in Tasmania, the ABS said all states “had a decrease in February 2009 – New South Wales (-2.4%), Victoria (-1.3%), Queensland (-2.2%), South Australia (-2.4%), Western Australia (-2.7%), Northern Territory (-0.1%) and the Australian Capital Territory (-0.5%).”

The apparent sharp rise in building approvals was driven by a sharp rise in the number of approvals of other dwellings, such as home units and townhouses; private house approvals edged up 0.1%. All these figures were out after economists at Goldman Sachs JBWere this morning changed their forecast from a rate cut by the RBA board next Tuesday to one of no rate cut.

That was after two speeches by senior RBA officials yesterday which made the point that while the bank was now expecting Australia to sag into a recession as growth turns negative in 2009, the country was well-placed to ride the out the “difficult’ times expected.

We know that growth will turn negative, the question is whether the slump is starting to accelerate. The RBA has cut deeply already to soften the blow, further rates might not do very much, but they might help send a positive message to consumers facing possible job losses.

The OneSteel cuts were announced as we learned that Australian manufacturing was again weak last month, according to the Australian Industry Group Performance of Manufacturing Index it conducts with PricewaterhouseCoopers.

The rose 1.7 points to 33.4 in March, a small gain yes, but still a sign the sector remains very subdued. Any reading below 50 is a sign of contraction in manufacturing. It was the 10th month in a row that activity has been in a state of contraction. Tonight and tomorrow will see similar surveys released for China, parts of Europe and the US for March. They will not make good reading.

And Japan’s key business confidence survey, the Tankan, was released today for the latest quarter in Tokyo by the Bank of Japan. It surveys sentiment among the top 10,000 companies in the country and the reading was gloomy, the worst ever, surpassing the previous record set in 1975.

The Bank of Japan reported that confidence dropped to minus 58 in March from minus 24 in the December previous quarter and plunging below its previous record low of minus 57 registered in 1975.

Peter Fray

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