Australia | Sep 03 2007
By Chris Shaw
With GDP figures for the Australian economy due out this week today’s release of inventory and business profit data was expected to fill in some holes in terms of predictions for the strength of the domestic economy but as is often the case with economists there is no consensus view.
Inventories posted a 0.4% increase for the quarter, which as TD Securities senior strategist Joshua Williamson notes was below the market’s forecast of a 1.0% increase. In his view the outcome is fairly neutral in terms of any impact on GDP, but his view is at odds with ANZ Bank senior economist Riki Polygenis and CBA’s Joseph Caurso.
Both suggest the lower than expected inventory figure will reduce GDP for the quarter, Polygenis estimating it will have a 0.7% impact and Capurso estimating an impact of 0.5%. Both had forecast GDP of 0.6% for the quarter and 3.8% for the year, but see downside risk following the inventory number. Williamson on the other hand is sticking with his 3.9% forecast for the full year, which implies an outcome of 0.75% for the June quarter.
In Capurso’s view the recent volatility in financial markets increases the risk business will cut their production and inventory levels, though he points out inventory in particular has limited downside as it is already at very low levels.
Also suggestive of the economy not being quite as strong as had been expected was the outcome for business profits, which while up 1.4% for the June quarter was short of the market’s expectation of a 2.0% increase.
This figure appears less important for GDP than does the inventory number though, as Williamson points out despite the weaker than expected outcome profits are still up 11.2% compared to one year ago.
Following both figures he still expects the Reserve Bank of Australia (RBA) to focus on inflation and with activity levels remaining ahead of aggregate supply he sees no change to the bias towards higher interest rates.
Commonwealth Bank senior economist Michael Workman agrees, noting today’s dwelling approvals data highlights an ongoing shortfall in housing construction, which will keep the market tight and so keep the pressure on inflation. He expects the RBA will tighten again in the first half of 2008, while Williamson sees scope for a hike in November if CPI data in October is higher than expected.