Interpac Business and Migration Solutions Melbourne Australia

Australian shoppers grew more cautious at the end of last year as the effects of rising interest rates and the fading impact of government handouts took their toll.

Retail sales fell 0.7 per cent in December alone, but rose 1.1 per cent for the December quarter, the Australian Bureau of Statistics reported, citing seasonally adjusted numbers. That compares with economists' forecasts for growth of 0.2 per cent and 1.1 per cent, respectively.

The weakness in the key retail sector helps explain the Reserve Bank's caution this week when its board left interest rates unchanged - surprising pundits and investors alike. The pause followed three consecutive monthly rate increases, starting last October.

"The RBA will look at these numbers and may take it as a sign that consumers are not as resilient as it had appeared earlier and interest rate hikes are starting to bite,'' said Helen Kevans, economist with JPMorgan.

''I think they'll want further evidence and will be watching consumer confidence, credit numbers, and home loan numbers for how the consumer is holding up in the Australian household sector."

The dollar sank on the news, falling about a third of a US cent, to drop below the 88 US-cent mark. The drop indicates investors are winding back predictions of further interest rate rises. Shares also extended their slide, trading down about 1 per cent for the day.

Investors now rate the probability of an interest rate rise when the RBA board meets in March at just over a one-in-four chance, according to Credit Suisse.

The weak retail sales figures are echoed by the performance of department store operator Myer, which today said many shoppers held off buying until the post-Christmas sales.

In other economic news out today, building approvals rose 2.2 per cent in December, better than analysts had tipped. From a year earlier, approvals were up a massive 53 per cent, more than the 38 per cent spurt expected.

Overall strength

The slowdown in December sales compared with a revised 1.5 per cent increase in November. While the quarter-on-quarter gain of 1.1 per cent matched expectations, it compared with a 0.7 per cent contraction in the September quarter, according to revised data from the ABS.

In trend terms, though, retail sales were more positive, rising 0.3 per cent in December, in line with increases of 0.4 per cent in the previous two months.

RBC economist, Su-Lin Ong, said December's drop was a corrective after the strong result in the previous month.

''After an enormous outsize month like that, the odds are that you'd get a drop,'' Ms Ong said. ''If you smooth out the volatility, it's clear that sales are running at a fairly decent pace.''

"It doesn't change the big bicture that the consumer remains fairly healthy, underpinned by high levels of confidence, mortgage rates that are still low, a recovery in household wealth and a fairly strong labour market.''

Ms Ong said retail sales growth for the December quarter is likely to add 0.2 percentage points to the 0.5 percentage point expansion she estimates for the period.

Take-aways on the up

In trend terms, turnover in cafes and restaurants and take-away food rose 1.4 per cent, to lead all sectors. Clothing and footwear rose 0.2 per cent, while department store sales rose 0.1 per cent, the ABS said.

''December shows some slowdown post government stimulus,'' Joshua Williamson, senior economist with Citigroup. ''With interest rates rising, consumer spending is going to be subdued in the first half of the year until nominal wages start rising with the positive labour market.''

Among the states, New South Wales led increases in trend terms in December, rising 0.7 per cent. Victoria posted gains of 0.2 per cent, as did Western Australia, while Queensland's sales were flat.