Australian economy on the improve after low interest rates


Low interest rates and gains in household wealth from rising house and share prices are luring consumers back to the shopping malls.

Retail sales jumped 0.7% in November and expanded 4.6% in the year to November. Retail spending is now above the long-run growth rate, although below the long-run average that prevailed before the GFC.

The data helps confirm that a recovery in retail spending has been underway since July last year.

This recovery in retail spending is gathering momentum, an encouraging sign for the economic outlook. Retail spending in the three months to November grew by 2.2% - the fastest pace in four years. 

Another encouraging sign is that the optimism reflected in consumer sentiment measures is finally translating into greater traction in the real economy.

Residential building approvals fell 1.5% in November, falling for a second consecutive month.  However, the detail in the release is still painting an encouraging picture for residential construction. Annual growth remains solid and has exceeded 20% for three consecutive months.

Also, trend growth, which looks past month-to-month volatility, is continuing to show a clear upswing in building approvals. 

The more stable component of approvals, private-sector housing rose a strong 6.0% in November. It was the strongest monthly gain since May 2012.

Rising house prices, low interest rates, robust population growth and a shortage of dwellings indicate that an upward trend in building approvals will continue and that a recovery in residential housing activity has further to run.

The lift in retail spending and upward underlying trend in building approvals sits with our view that the Australian economy will gradually recover this year and the RBA will refrain from cutting rates again in this cycle.


The European Central Bank meeting was the main highlight for the overnight session, but most asset classes lacked much clear direction ahead of the key non-farm payroll data from the US tonight. 

Share Markets: 

US equity markets were largely flat. European shares weakened likely reflecting the cautious outlook from ECB President Draghi despite the renewed commitment to provide stimulus.


US treasuries strengthened (yields fell) despite some more encouraging US jobs data. Yields fell after a well-bid 30-year bond auction worth $13bn.

Bond yields however are likely to climb higher over 2014, particularly if the US recovery improves further and the Federal Reserve continues to slow its stimulus program.

Foreign Exchange:

Currency markets fluctuated on ECB comments, but were relatively unchanged. US The euro fell to a 1-month low after the dovish statement from Draghi, but then rebounded later on.

The Australian dollar stayed close to 89 US cents. AUD failed to sustain any gains from more positive domestic retail sales data yesterday.  


Most commodity prices were lower, reflecting the caution mood ahead of key jobs data tonight. Gold prices rose snapping a two-day losing streak.


Consumer price inflation rose by 2.5% in the year to December, down from 3.0% growth in November.  Producer prices meanwhile contracted 1.4% in the same time period.


The European Central Bank (ECB) left monetary policy on hold.

The Council "firmly" reiterated forward guidance to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. Downside growth risks remained, while a prolonged period of low inflation continued to be expected.

In the press conference, ECB chief Draghi said "With regard to money market conditions and their potential impact on our monetary policy stance, we are monitoring developments closely and are ready to consider all available instruments... we remain determined to maintain a high degree of monetary accommodation and to take further decisive action if required."

In other data, economic confidence rose from 98.5 to 100.0 in December the highest in nearly two years.

The business climate indicator however, edged lower from 0.31 to 0.27 last month.

German industrial production bounced 1.9% in November after falling 1.2% at the start of Q4.

United Kingdom:

The Bank of England (BoE) left monetary policy on hold. It follows a move late last year by adjusting the funding for lending scheme to exclude mortgage lending - effectively tightening financial conditions.

UK exports recovered a 2% in November, after drifting weaker in prior months. Imports rose 0.8%.

United States: 

US initial jobless claims fell 15k to 330k for the week ending January 4 however distortions from difficulties in seasonally adjustment around the holiday period remained.