A new forecast points to a coming recession and the latest retail figures show the Government's December stimulus package did less than expected.
But the Reserve Bank is confident Australia is performing better than most other nations.
Official figures issued yesterday showed older and lower-income Australians appeared to have saved most of the $8.7billion December handouts. Retail sales were up 0.8per cent in seasonally adjusted volume terms to $53.5billion in the December quarter, below forecasts of a 1per cent rise. ACT spending was up 1.6per cent.
ANZ senior economist Katie Dean said it was disappointing considering the handouts.
''Unsurprisingly, most of the weakness in [December quarter] volumes was in discretionary items of spending, such as clothing and soft goods and cafes, restaurants and takeaway food,'' she said. ''Clearly, uncertainty about job prospects does weigh on consumer spending ... it's going to be a tough time as the unemployment rate continues to rise.''
JP Morgan economist Helen Kevans said the handouts, combined with significant discounting, big interest rate cuts and falling petrol prices contributed to the increase, but the outlook for consumers was bleak. ''Households are facing considerable headwinds owing to the massive wealth destruction under way in the highly leveraged household sector,'' she said.
Treasurer Wayne Swan said this was a solid retail result and showed the Federal Government's economic security strategy had supported jobs, but new Opposition treasury spokesman Joe Hockey said only a fraction of the handouts was spent.
The Westpac-Melbourne Institute Leading Index, meant to forecast economic growth for up to nine months, dropped to minus 1.2per cent for December, well below the long-term trend of 3.5per cent. Negative results usually point to a coming recession.
''This [and recent consumer sentiment surveys] suggests that the full impact of the global slowdown on the Australian economy still lies ahead,'' the index said.
But Reserve Bank assistant governor of economics Malcolm Edey said, ''There are reasons to expect that the Australian economy can continue to perform better than its international counterparts in the difficult period that lies ahead. Australia had more momentum than most comparable countries in the period leading into the crisis.
''As in other countries, substantial monetary and fiscal measures have been taken to support growth. But an important difference is that the Australian financial system remains in much better shape than its international counterparts.''
He did not give any indications of the Reserve's next move on interest rates, but governor Glenn Stevens is expected to give a better hint when he appears before a parliamentary committee tomorrow.
Australian Chamber of Commerce and Industry chief executive Peter Anderson said yesterday its latest small business conditions survey showed prospects ''remain weak amid further deterioration in global economic activity as well as persistent weakness in business and consumer confidence''. The survey's index fell to 34.2, its lowest level since the survey began in 1996 and well below the five-year average of 53.3.
Mr Anderson said the economic slowdown was a reason to get rid of pay roll tax.
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