January 9, 2014 / 3:06 AM / in 4 years

UPDATE 1-Australians learn to spend again as low rates lift spirits

* Retail sales outpace forecasts for fourth month of solid gains

* Home building on track for much stronger year as low rates work

* Markets all but price out risk of further RBA easing

By Wayne Cole

SYDNEY, Jan 9 (Reuters) - Australians have rediscovered the urge to spend as retail sales and house building blew past expectations in November, just the warming mixture needed to help offset a cooling mining boom.

That is exactly the outcome the Reserve Bank of Australia (RBA) sought when it steadily cut interest rates to record lows last year and reinforces market expectations that the next move will be up, albeit not for some time yet.

“Sales momentum has picked up since August, and given the reasonably positive anecdotes, the odds are that sales finished 2013 on a firm note,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

“The RBA will welcome the ongoing signs of policy traction and stay on the sidelines.”

Rates have been on hold at 2.5 percent since August and investors have priced out almost any chance of another easing this year. Indeed, futures markets show some are wagering that 2014 could end with rates on the rise.

Thursday’s figures from the Australian Bureau of Statistics showed retail sales rose 0.7 percent in November to a seasonally adjusted A$22.5 billion ($20 billion), easily outpacing market forecasts of a 0.3 percent gain.

Importantly, it was also the fourth straight month of solid increases in spending after a fallow period earlier in the year and lifted annual growth in sales to 4.6 percent, the fastest pace in 17 months.

That is a big plus for economic growth since retail spending makes up almost a third of household consumption, which in turn accounts for 53 percent of the country’s A$1.5 trillion in annual gross domestic product (GDP).

Evidence suggests wallets have stayed open with the major retailers reporting a strong holiday shopping period. The Australian Retailers Association estimates A$42 billion was spent just in the lead up to Christmas.

Demand for new vehicles also ended the year on a high note with sales in December up 5.3 percent on the previous month, according to the Federal Chamber of Automotive Industries.

“Anecdotally the Australia economy seems to have lifted a gear over December, which has continued early into the New Year,” said Savanth Sebastian, an economist at CommSec.

“Consumers certainly have more reason to be optimistic given, warmer weather, rising house prices and recent share market gains - all supporting a lift in sentiment.”

The ascent of home prices, which grew at an almost 10 percent pace over 2013, has in turn encouraged a much needed revival in home construction.

Approvals to build new houses jumped 6 percent in November, from the previous month, to be at the highest since mid-2010. For the year to November, approvals were up by a barnstorming 18 percent.

Include apartment buildings, and approvals for the year were up no less than 22 percent.

Home construction has an outsized impact on the economy given all the different trades involved and habit of buyers to pick up new furniture and electronics. The sector is also a big employer and contributes heavily to state tax revenues.

The ABS estimates that every A$1 spent on residential construction generates A$1.31 worth of spending elsewhere in the economy, while every million dollars spent creates 17 jobs.

As a result, a typical recovery in housing can add 2 percentage points or more to economic growth over a two to three year cycle.

“The residential construction upturn looks to be firmly entrenched, and will be one offset to lower levels of mining construction.” said Diana Mousina, an economist at Commonwealth Bank of Australia.

“The RBA will be pleased that prior cuts to interest rates are having a noticeable impact on the housing market.” (Reporting by Wayne Cole; Editing by Jacqueline Wong)

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