Cautiously positive

Last week brought a grab-bag of data releases that were mostly on the positive side for the domestic economy, though with some lingering points of weakness. The Reserve Bank's sixmonthly review of the financial system didn't offer up any surprises. The real highlight will be this Thursday's announcement on its proposed changes to bank capital requirements.

Kicking off last week was retail spending, which rose by 1.6% in the September quarter after a subdued 0.2% rise in the June quarter. The gains were widespread across store types, including strong gains in home furnishings and recreational goods. The pickup in spending was consistent with the recent firming in the housing market, which will have given households a little more confidence about opening up their wallets.

While the rise in retail spending was well above market forecasts, it was close to our own forecast and doesn't alter our view that overall GDP for the September quarter is likely to be soft. We expect that gains in retail, agriculture and construction will be largely offset by weakness in personal and business services and in manufacturing. We're expecting GDP growth of just 0.3% for the quarter, a forecast that we'll firm up as other sectoral indicators are released over the next two weeks.

As we noted in our latest quarterly Economic Overview, while we've marked down our expectations for September quarter GDP over the last few months, we've also become more confident that this will mark the low point for growth. The remainder of last week's data releases, all pertaining to the December quarter, have bolstered that view.

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