SYDNEY (REUTERS) - Retail sales in Australia were surprisingly soft in November, as spending fell on clothes and household goods, a sign lower interest rates had yet to breathe life into the long-struggling bricks and mortar shopping sector.

Wednesday's data from the Australian Bureau of Statistics showed retail sales dipped 0.1 per cent in November to A$21.53 billion (S$27.7 billion), confounding forecasts of a 0.3 per cent increase. Annual growth in sales slowed to just 2.9 per cent, half the pace that used to be considered "normal".

The subdued result added modestly to the case for further cuts in interest rates.

The Reserve Bank of Australia (RBA) eased in both October and December, taking rates to a record-matching low of 3 per cent. Yet, demand for credit has remained anaemic while the housing market is sluggish at best, leading some analysts to argue that further stimulus is needed.

"With credit growth also weak, there are still very few signs that interest rate relief is being used for purposes other than deleveraging," said Mr Michael Turner, a strategist at RBC Capital Markets.

Investors are pricing in at least one more quarter-point cut, though an improving global outlook coupled with price gains for some of Australia's major exports, notably iron ore, has lessened the urgency for a move.

As a result, markets have pared back the probability of a cut at the next RBA meeting next month to around 40 per cent but are fully priced for a move by April.

"With the RBA arguably getting on the front foot with two cuts and global sentiment improved over the past several weeks, today's data do not make the case for easing in February much stronger," argued Mr Turner.

The A$260 billion retail sector accounts for 18 per cent of Australia's annual economic output and, with 10 per cent of all jobs, is the second-biggest employer after the health-care sector.

The industry has been suffering in the face of intense foreign competition as a high local dollar makes imports cheaper. Australians have also become more frugal, choosing to save more and borrow less.

Discounting has become commonplace. On Wednesday, supermarket giant Coles said it was cutting prices on over 100 items from bread to cheese, frozen foods and health products.

Such cuts tend to crimp growth in nominal sales values, but also help hold down inflation in the economy.

Long-running shifts in spending habits also mean the retail figures alone tend to overstate the weakness of consumption.

For one, people are shopping more on the Internet, which is not fully captured by the official statistics.

A measure of online sales from the National Australia Bank jumped 15 per cent in November, from the month before, taking annual growth in sales to a brisk 27 per cent.

The index valued online sales in Australia at A$12.6 billion for the year to November, equal to around 5.7 per cent of overall retail spending.

Australians have also been taking advantage of the high local dollar to go abroad in record numbers. Monthly departures have climbed 42 per cent over the past five years.

Neither have consumers been shy about buying cars. Sales of new vehicles hit an all-time high for December to be up almost 16 per cent on the year, according to industry figures.

Sales of sport-utility vehicles in particular had a barnstorming year, hardly the sign of a consumer in full retreat.