Australian Confidence Slump, Loan Drop Show Economy Is Slowing

By Victoria Batchelor

July 9 (Bloomberg) -- Australian consumer confidence fell to a 16-year low and home-loan approvals dropped by the most in eight years, pushing down the nation's currency on speculation the central bank won't raise interest rates again this year.

Westpac Banking Corp.'s sentiment index slumped 6.7 percent to 79 points in July, the sixth straight reading of less than 100, showing pessimists outnumber optimists. The number of loans granted to build or buy homes and apartments dropped 7.9 percent from April, the statistics bureau said in Sydney today.

Consumers, grappling with record fuel prices and the highest borrowing costs in 12 years, are shunning property purchases and paring spending at retailers Just Group Ltd. and David Jones Ltd. The reports underline evidence the central bank's rate increases this year are slowing the economy, which will cool the fastest inflation in almost two decades.

``Significantly higher interest rates are really biting,'' said Andrew Hanlan, senior economist at Westpac Bank in Sydney. ``That will start to slow inflation, suggesting that rate increases are behind us and the central bank is firmly on hold.''

Confidence among consumers globally is declining as spiraling food and fuel prices erode their purchasing power.

U.K. consumer confidence fell to the lowest level since at least 2004, a report today showed. Japanese household confidence slumped to the second-lowest level on record in May. Sentiment among New Zealanders dropped to an all-time low in June.

Dollar Drops

Australia's dollar fell to 95.06 U.S. cents at 12:57 p.m. in Sydney from 95.47 cents just before the confidence index was released. The two-year bond yield dropped 2 basis points, or 0.02 percentage point, to 6.68 percent.

``Consumer spending has been weaker than was anticipated,'' because of soaring fuel and food costs, Ian Pollard, chairman of clothing retailer Just Group, said on July 2. ``The recent softening in the retail market is being felt by most market participants.''

The nation's S&P/ASX 200 index of shares has slumped 21 percent this year, outpacing declines in benchmark indexes in the U.K., Japan and the U.S. Australia's stock index rose 1.8 percent today, in line with moves in global markets.

Shares in James Hardie Industries NV, which manufactures building products, fell 2.6 percent to A$4.09. Billabong International Ltd., which makes sports clothes, dropped 1.3 percent to A$10.72.

`Hit Hard'

``Australian consumers' sentiment and cash flow have been hit hard by rising interest rates, rents, and food and fuel prices,'' said Paul Braddick, head of property analysis at Australia & New Zealand Banking Group Ltd. in Melbourne.

Westpac's confidence survey of 1,200 households was conducted from June 30 to July 6.

Since the previous month's poll, the price of crude oil has risen 11.5 percent and the cost of gasoline in Australia has climbed 3.4 percent. Crude oil reached a record $145.85 a barrel in New York on July 3.

The decline in mortgage approvals was the biggest monthly drop since June 2000, according to the statistics bureau. Home- loan permits are at the lowest level since October 2004.

An index measuring construction work contracted for the first time in four years, according to a separate survey by Master Builders Australia, released in Canberra today.

``The housing industry is officially in the doldrums,'' said Brian Seidler, an executive director of Master Builders' New South Wales branch.

Mortgage Rates

The Reserve Bank of Australia raised its benchmark interest rate to 7.25 percent in March. It has boosted borrowing costs four times since August 2007 to cool the fastest inflation since 1991.

Rate increases by the central bank and commercial lenders since August have added about A$210 ($200) to the monthly repayments on an average A$250,000 home loan.

St. George Bank Ltd. boosted its variable home-loan rate a further 0.2 percentage point to 9.67 percent, effective from yesterday. That will add about A$40 to monthly repayments on an average mortgage.

``Today's data further supports expectations the Reserve Bank is on hold for the rest of 2008,'' said Spiros Papadopoulos, an economist at National Australia Bank Ltd. in Melbourne.

Eighteen of 25 economists surveyed on June 30 said the central bank will keep the benchmark rate unchanged for the rest of 2008, six forecast an increase and one a cut.

To contact the reporter on this story: Victoria Batchelor in Sydney at vbatchelor@bloomberg.net.