Australian shoppers kept their cash in their pockets at Christmas in the latest sign that the national economy is cooling off.Retail sales posted a surprise 0.1 per cent fall in the crucial month of December, according to new figures released by the Australian Bureau of Statistics.Analysts expected a 0.2 per cent rise for the month, but struggling retailers endured a softer-than-predicted end to the year, traditionally the most important period for the retail sector. Sales in November were revised up to a 0.1 per cent gain from the originally reported flat result.The weak Christmas result bolsters the case for a rate cut at tomorrow's RBA board meeting, adding to recent indications that the Australian economy is slowing down.

Retail sales also disappointed on a quarterly basis. With inflation stripped out consumer, spending rose 0.4 per cent in the final three months of 2011. Analysts expected a 0.6 per cent increase in the fourth quarter. The Australian dollar lost ground after the release of weaker-than-expected sales data. The currency was at $US1.0748 just before the data’s release, but fell to $US1.0728 immediately afterwards. It quickly regained the losses.

AMP Senior Australian Economist Bob Cunneen said the December numbers were "very soft". "It closes off last year on very disappointing terms," he said.

"It definitely favours another rate cut by the RBA. The RBA should be able to see consumers are very subdued, which partly reflects global concerns such as Europe but also reflects that (the fact that the) labour market is softening here."

Also, Mr Cunneen said house prices were diving lower and the sharemarket slumped over 2011, which have undercut consumers' confidence about spending.

Bank of Melbourne chief economist Besa Deda said consumers were still hesitant to spend up "given the weaker prospect for global growth and the softening of employment growth at home".

Ms Deda said increased discounting likely helped lift sales of clothing and footwear by 3.5 per cent in the month and department store sales, which increased 1.1 per cent.

"Cold weather might have still contributed to weakness in the sense that the rain and cooler weather might have kept consumers indoors more," said Ms Deda.

Retail sales, a key indicator of the strength of the domestic economy, have been under a cloud for most of last year. Retail trade fell in the month to a seasonally adjusted $20.885 billion, compared to a downwardly revised $20.909 billion in November. Over the December quarter, retail sales rose by 0.4 per cent to $60.773 billion in seasonally adjusted volume terms.

Food retailing dropped 0.7 per cent in December, while restaurants and takeaway food sales dropped 1.8 per cent, ABS data showed.

The retail sector has been squeezed by online competition for overseas, with consumers using the supercharged strength of the Australian dollar to bypass local shops. Bricks and mortar retailers also face high rent and labour costs compared to their peers in the US and UK whom they are now competing against.

Uncertainty about the health of the economy has also weighted on the confidence of consumers who, like the American and British counterparts, have begun to curb discretionary spending in favour of increased savings and debt repayment.

Domestic online retail sales are included in the overall retail sales figure but are not broken out as a seperate category. The ABS data does not include online purchases made from overseas-based websites.

Source SMH.