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Australia's weak consumer spending bolsters case for rate cuts

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Australian retailers began the second quarter of the year on a gloomy note as sales fell in April in a sign of rising strain on the broader economy just hours before the country's central bank is seen likely to cut interest rates to record lows.

[SYDNEY] Australian retailers began the second quarter of the year on a gloomy note as sales fell in April in a sign of rising strain on the broader economy just hours before the country's central bank is seen likely to cut interest rates to record lows.

Tuesday's data from the Australian Bureau of Statistics (ABS) showed retail sales fell 0.1 per cent in April from March, the first negative reading this year and confounding forecasts for a 0.2 per cent gain.

The decline, led by household goods, eating out and clothing, briefly sent the local dollar to the day's low of US$0.6959. The currency was last flat at US$0.6973.

Household consumption has been a major source of worry for the Reserve Bank of Australia (RBA) as miserly wage growth and falling home prices eat into spending power in a sector that accounts for 56 per cent of the economy.

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The soggy data will support widespread expectations for at least two cuts this year to 1.00 per cent. Financial markets are pricing in a 50-50 chance of a third move to 0.75 per cent by Christmas.

A cut on Tuesday - the decision is due at 0430 GMT - will be the first since August 2016.

Economists say better days might be ahead, helped by expectations of lower mortgage rates and a boost to household incomes from promised income tax cuts.

A 3 per cent increase in the national minimum wage from July 1 will likely support those on lower incomes, aiding consumption.

Yet, industry-wide wage growth is rising at a snail-paced 2.3 per cent and "if that doesn't improve then any pick-up in retail spending will be short-lived," said Callam Pickering, Apac economist for global job site Indeed.

TWO SPEED ECONOMY

In contrast to the gloomy household sector, businesses are holding up better.

Other data released on Tuesday showed exports added 0.2 percentage points to first-quarter gross domestic product (GDP) led by booming demand for Australia's resources, notably iron ore.

The trade surplus ballooned to US$13.6 billion in the March quarter, easily the highest on record, offsetting much of the country's perennial deficit in income, which includes dividend and debt payments, investment flows and the like.

As a result, Australia's current account deficit shrank to just A$2.9 billion, better than an upwardly revised A$6.3 billion deficit in the previous quarter and the smallest since mid-1997.

That follows data on Monday showing a decent increase in first-quarter company profits together with higher wages, prompting some economists to upgrade their GDP forecasts.

Data, due 0130 GMT on Wednesday, is now likely to show Australia's economy grew 0.5 per cent for the first quarter, from earlier expectations of 0.4 per cent. Annual growth is still seen slowing to a decade-low of 1.8 per cent.

"In light of the data... we are nudging up our estimate for Q1 GDP from 0.4 per cent quarter on quarter to 0.5 per cent quarter on quarter," said Ben Udy, Singapore-based economist for Capital Economics.

"The big unknown is still consumption spending."

REUTERS