By Chris Shaw

The interest rate sensitive sectors of the Australian economy appear to be slowing, as evidenced by the May data for both retail sales and building approvals. Retail sales rose 0.2% in line with market expectations, while building approvals fell 6.6% against expectations of a flat result.

With respect to retail sales, ANZ Banking Group senior economist Amber Rabinov notes the result means in annual terms sales are up just 1.2%. Discretionary spending has been holding back the overall result as this measure is up just 0.4% compared to year-ago levels.

Rabinov suggests the data show Australian economic momentum is taking something of a breather as the economy adjusts to tighter monetary policy and the removal of fiscal stimulus measures. As evidence of this, Rabinov notes the 1.2% annual gain in retail sales is actually a fall in per capita terms, as the population is estimated to have grown by around 2% over the same period.

Westpac attributes this to continued consumer caution, as the focus at present appears to be on paying down debt and strengthening household balance sheets. As well, the bank suggests interest rate rises have been enough to offset the combination of strong population growth, rising employment and increasing household net worth.

With respect to building approvals, the fall of 6.6% in May follows a 14.8% decline in April, Rabinov noting it was the other private sector dwellings category that drove the fall. This sector, which includes units and apartments, fell 18.8% for the month against a 1.7% gain in approvals for private sector detached houses.

Westpac suggests the May data add to signs of an underlying cyclical turning point, as after rising by 49% in the year to January trend approvals are now declining at an average pace of 1.5% per month for the past three months. This equates to an annual pace of decline of 16%.

Adding weight to the Westpac view that a turning point in building approvals data has been reached is the fact that declines were recorded in every state except for South Australia. The bank expects further falls as the full extent of the slowing in first home buyer demand and interest rate rises flow through.

While more data are required to confirm the bank's view, it suggests the most likely outcome is a decline in approvals from current levels of around 175-180,000 per year to something around 160,000 per year. Any downswing in approvals is only likely to show through in declining activity levels well into 2011 in the bank's view.

According to Rabinov, today's building approvals data confirm ANZ's view the current housing market imbalance in Australia will continue as demand continues to outstrip sluggish supply growth.

Leading into today's data the Australian dollar was under pressure and Westpac expects this trend will continue, as post the data release the currency fell through the US0.8400 level to hit fresh lows for the day. The bank sees US$0.8260/70 as the next target region for the market as this would represent a 76.4% retracement of the move from US$0.8080 to US$0.8860.

Rabinov suggests today's Australian data, along with a softening in Chinese PMI data for June, are likely to be enough to keep the Reserve Bank of Australia (RBA) on the sidelines for now with respect to official interest rates.

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