WRAPUP 1-Australia retail sales jump, building slumps

* Retail sales jump in May, fuelled by policy stimulus

* Approvals to build homes weak as apartments slump

* Manufacturers see modest improvement in subdued activity

By Wayne Cole

SYDNEY, July 1 (Reuters) - Australian retail sales jumped
by 1.0 percent in May, twice the market forecast, as government
give-aways and historically low borrowing costs fuelled
spending at department stores and cafes.

However, other data on Wednesday showed a shock 12.5
percent drop in approvals to build new homes in May, as the
volatile multi-unit sector slumped 43.6 percent to the lowest
since 1987.

The mixed news only added to expectations the Reserve Bank
of Australia (RBA) would leave rates unchanged at 3.0 percent
at its July policy meeting next week.

"For the RBA, overall it adds to the view that the
economy's not really in any need of extra policy assistance
right now," said Michael Blythe, chief economist at
Commonwealth Bank.

"But if those approval numbers are telling us something
then it's also an indication they won't be thinking about rate
rises any time soon," he added.

The market seemed to agree, nudging bill futures higher
<0#YBA:> while leaving the local dollar steady around $0.8050.

The rise in retail sales was double the 0.5 percent
forecast and at a record A$19.55 billion ($15.8 billion), sales
were a rousing 7.1 percent up on May last year.

Retail sales account for around 23 percent of Australia's
GDP and the sector is the biggest employer with about 15
percent of all jobs.

For a graphic of sales click on:

here

Department stores led the way in May boasting a 5.5 percent
jump in sales, while clothing rose 2.9 percent and restaurants
and cafes saw a 1.4 percent increase.

One beneficiary was department store chain David Jones
(DJS.AX) which on Tuesday raised its profit forecast for the
year to end June, predicting growth of 20 to 30 percent thanks
to better sales in May and, tellingly, for June as well.

FISCAL CANDY

Sales have been wildly distorted by government hand-outs in
recent months, and there are more tax cuts coming in July. The
RBA's aggressive rate-cutting campaign has also sharply lowered
interest costs.

"Sales were clearly helped by all this stimulus," said
Su-Lin Ong, a senior economist at RBC Capital Markets. "The
test will be when the fiscal candy runs out later in the year."

Government largesse has also played a part in a rebound in
the housing market as generous grants for first-time buyers
boosted sales and mortgage demand.

Which was why the 12.5 percent drop in approvals to build
homes came as such a shock. Most of the weakness was
concentrated in the multi-unit sector which is notoriously
volatile.

"Maybe some apartment approvals got pulled for lack of
financing, but it's not clear," said Ong at RBC. "Core private
houses approvals dipped but are still trending higher, so I'm
reluctant to read too much into one month's figures."

Other data released on Wednesday showed activity in
Australia's hard-hit manufacturing sector was slowly improving.

The Australian Industry Group/PriceWaterhouseCoopers
Performance of Manufacturing Index (PMI) rose 0.9 points to
38.4 in June. That was the highest reading in eight months, but
still well below the 50 threshold separating growth from
contraction.

The survey did show a tentative improvement in employment,
with that at a five-month high. Manufacturing has been one of
the weakest areas of an otherwise resilient labour market.

"Clearly government stimulus, lower interest rates and
strengthening confidence have benefited some sectors," said Ai
Group Chief Executive Heather Ridout.

(Editing by Dayan Candappa)