Housing lifts but economy subdued

Australia's economy is continuing to grow, though at a slow pace, just days out from the election.

Australia's economy is continuing to grow, though at a slow pace, just days out from the election.

But economists warn that the much-needed rebalancing of economic activity away from the mining sector towards non-mining parts of the economy remains "just a forecast" with few signs of life outside of the housing sector.

The Reserve Bank of Australia kept the official interest rate at 2.5 per cent on Tuesday, admitting that the economy had been growing "a bit below trend" for the past 12 months.

Economic activity was likely to remain subdued in the near-term, despite a 15 per cent fall in the value of Australia's dollar since early April.

"[But] it is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy," RBA governor Glenn Stevens said.

Bureau of Statistics figures released on Tuesday show retail sales grew by just 0.1 per cent in July, seasonally adjusted, after sales in big department stores fell by nearly 8 per cent.

This followed months of flat or negative sales growth, and meant annual growth in July was just 1.9 per cent - well below the inflation rate of 2.4 per cent.

Economists said this showed the much-touted rebalancing of the economy was still a long way off.

"The retail numbers weren't particularly impressive, and in terms of the rebalancing of the economy that we've been expecting we're really only seeing it in the housing market; it hasn't broadened beyond housing," HSBC Australia chief economist Paul Bloxham said.

"We're still expecting it to come but that broader rebalancing is still a forecast."

The continuing weakness in retail sales was an added reason that the RBA might have to cut rates again this year, National Australia Bank economist Spiros Papadopoulos said.

"Rising unemployment in an economy growing below 3 per cent will continue to weigh on consumers' minds and it will be some time before we see retail spending and consumption growing strongly again," he said.

New data showed the current account deficit, which shows the extent to which we call on the savings of foreigners to fund the part of our nation's investment spending that we're unable to fund from our own saving, increased in the three months to June by $610 million, or 7 per cent, to $9.35 billion.

But economists said the number was better than it looked, because the current account is broadly improving.

"We're seeing a narrowing in the current account in a trend sense," Mr Bloxham said.

"And I'd expect that trend to continue. We're going to get support from exports of commodities and a slowdown in imports because the mining investment boom is peaking, so that combination should see an improvement in our trade position over time," he said.

Gross domestic product data will be released on Wednesday for the three months to June.

Economists are broadly expecting annual growth for the economy to be about 2.5 per cent.

"Our expectation for Wednesday's second quarter GDP is a rise of 0.6 per cent, giving an unchanged annual rate of 2.5 per cent, barring revisions," Commonwealth Bank economist Michael Workman said.

St George economist Janu Chan said she was now forecasting GDP growth of 0.6 per cent for the June quarter, and 2.5 per cent growth in the year to the June quarter.

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