If we didn’t have a recession, we would have had a rate rise yesterday after building approvals, retail sales and trade figures all came at better-than-expected levels.

But we do have a recession, so the better performance in three key areas of the economy is good news and will help lighten the gloom from an alarmist Government spruiking budget deficits of up to $50 billion.

The prospects of further interest rate cuts have been diminished by more solid reports about the month of March from the Australian Bureau of Statistics with retail sales bouncing back and the trade surplus expanding sharply.

Government stimulus spending and 400 basis points of rate cuts seems to be doing the trick, keeping consumption buoyant while the pace of the domestic slump cuts demand for capital goods.

Retail sales jumped 2.2% in March from February, reversing the sharp fall in that month, while our trade surplus rose 43% in March from February’s revised surplus, to a near record $2.5 billion.

A sharp fall in imports of capital goods (and a fall in imports of non-monetary gold) more than offset a small but significant rise in consumption goods, especially textiles, clothing and footwear (up $340 million in the month overall).

Coming on top of stronger than expected building approvals, especially for new homes as the first home buyers scheme kicked in March (up 3.5% overall and 2.8% for new private dwellings), it’s clear that a combination of the Federal Government’s two stimulus packages and the slumping level of demand is helping steady the economy, and our trade performance.

While the April jobs and unemployment figures tomorrow won’t be good, that has already been factored into the Reserve Bank’s thinking on the health of the economy and future direction for rates.

The rise in retail sales was bigger than the market expected (up 0.5%). It’s more evidence that the spending boost from the start of the second stimulus package is working its way through the economy and will show up in April and probably May’s retail sales figures.

The ABS said this morning:

The seasonally adjusted estimate increased by 2.2% in March 2009. This follows a decrease of 2.0% in February 2009 and an increase of 0.5% in January 2009.

In seasonally adjusted terms, all industries had an increase in March 2009 – Food retailing (+0.4%), Department stores (+13.2%), Clothing and soft good retailing (+6.4%), Household good retailing (+1.3%), Other retailing (+1.5%) and Cafes, restaurants and takeaway food services (+1.4%).

In seasonally adjusted terms, all states, except the Australian Capital Territory (-0.1%), had an increase in March 2009 – New South Wales (+1.2%), Victoria (+2.7%), Queensland (+3.2%), South Australia (+2.4%), Western Australia (+2.2%), Tasmania (+2.2%) and the Northern Territory (+4.2%).

In original terms, Australian turnover increased by 6.4% in March 2009 compared with March 2008.

The trade performance more than reflected the slump in demand for imports, while export income was steady, despite falls in commodity prices. That’s because the month of March was the last for the very high priced coking, thermal coal and iron ore exports. New, lower prices for coal started April 1 and while new iron ore prices have yet to be agreed on by BHP Billiton and Rio Tinto, there is talk of provisional pricing.

Of interest is that the trade surplus and export performance has been strong through the March quarter, despite BHP and other companies selling unwanted tonnages of iron ore, various coals and other minerals onto the spot markets at sharply lower prices. That won’t hold off the day when the sharp fall in export income, and the rapid worsening in our terms of trade and in our national income, start showing up in the official figures.

We should get a glimpse this time next month, and a better idea in June.

Peter Fray

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