Australian economy doing better than expected

Australia's economy is performing slightly better than expected, with a small pick-up in retail sales in July and strong growth in business investment plans for capital expenditure.

Retail sales rose half a per cent in July, the Australian Bureau of Statistics (ABS) said today.

That was above economists' forecasts of an 0.3 per cent rise.

More significantly, new private capital expenditure rose 4.9 per cent in real terms, seasonally adjusted, in the June quarter, the ABS said.

The median market forecast was for a rise of 4.0 per cent in the June quarter.

RBC Capital Markets senior economist Su-Lin Ong said both releases had surprised to the upside.

Ong said the capital expenditure data showed business spending plans were "very much on track", which was key to the central bank's forecast of stronger economic growth over the medium term.

"The business spending story is well underway and, more importantly, the spending plans for fiscal year 2011/12 remain very strong," she said.

"It is a very big pipeline of expenditure that is coming through and it will continue to be supportive of growth going forward."

The retail sales figure was "a reasonable number all round", following on the back of two fairly weak months.

"With the exception of clothing and footwear, pretty much all the other components rose, including some quite discretionary components such as department store sales, cafes, restaurants and takeaways," Ong said.

"I don't think it changes the overall picture that consumers are fairly cautious, but this was at least a rare upside surprise."

Ong said the data was not likely to prompt the Reserve Bank of Australia (RBA) out of its holding stance on interest rates.

"While the capex story is a very positive one over the medium term and will draw on labour and resources, there is no doubt that the more pressing issue for the RBA at the moment is the global backdrop and global uncertainty and that is enough to keep them on hold for some time," she said.