FYI | Dec 05 2007
Ever since the recent Federal elections changed the political landscape in Australia I have been telling people in my surroundings that most Australians probably don’t realize how things will change from now on.
This is likely to be even more so in the neighbourhood where I live and work (well known blue ribbon region) and the sector wherein I operate – the financial sector in Australia and abroad.
And so it was that I read in the newspaper this week that the Australian delegation at the UN Climate Conference in Bali received general applause from the other attendants while entering the conference room – now that’s a change!
However, little did I know that one of the biggest changes for the financial sector in Australia would come on Wednesday with the Reserve Bank announcing it had adopted a more open communication policy.
Talking about a genuine surprise..!
Those who have been reading my stories and analyses throughout the years know that I have been very vocal on this issue, and repeatedly so. Just to cap off this subject, as this will be the last time I can repeat my tantrum of the recent years: I thought the way the RBA communicated with the outside world was utterly archaic, outmoded and, like the French would call it, “hautain” (that is “patronizing” or “elitist” for your average Aussie reader).
I vividly remember the first time I had to report on the RBA’s rate decision and asked my editor at the time how do I know when there’s no change since the RBA only issues a statement when it changes the official cash rate?
I genuinely could not believe that Australian journalists would argue about this with me, defending the logic behind the RBA’s silence every time interest rates remained unchanged. As if leaving rates untouched is not making a decision!
Anyway, they have finally seen the light at Martin Place in Sydney, though they’re still far behind what the Federal Reserve in the US displays in open communication these days. One of the surprise elements in today’s change of policy announcement was no doubt the fact that the RBA had been working on this for months.
Why this change required “months” (plural) of preparation is beyond my imagination, other than that the previous government simply did not want too much open communication before the election. The RBA statement does not reveal whether a continuation of the Howard-Costello team would have resulted in the same change this week, but I’ll leave that to other journalists with much better contacts inside the RBA to find out and comment upon over the next few days.
(I have little doubt that this shift in RBA policy will be analysed and commented upon by others this week).
The main question is, however, do we learn anything new from today’s first release of RBA Statement and the Minutes from the previous board meeting? (One could argue that the whole exercise is a bit of a non-event should the answer be negative).
I’d say both releases don’t exactly make for exciting reading, especially the Minutes seem more like a summary of what happened in the month preceding the previous board meeting rather than providing us with anything new. No doubt, some journalists will pick up the hint that the Howard-Costello government was pumping too much money back into the electorate’s pockets, but that’s about it, I’d say, as far as the Minutes go.
On the other hand, the statement by Glenn Stevens, Governor Monetary Policy at the RBA, contains one sentence that immediately caught my eye – and I am very curious whether other journalists elsewhere will pick up its true meaning.
After telling us all what we should know by now -global economic growth is on a declining path, led by the US housing sector and the global credit squeeze- the statement continues: “it now appears likely that global growth will be closer to trend in 2008, after several years of above trend growth”.
As this shift to a more subdued expectation for global growth next year comes at a time when an increasing amount of economists around the globe is reducing growth estimates, this should not be taken lightly by investors. Remember, this is the central bank of Australia – they cannot issue too negative or too specific announcements.
But, what exactly does “closer to trend in 2008” mean?
I spent a considerable amount of time on the internet this afternoon to find out how to quantify the trend for global economic growth over the longer term, until I discovered one source that put global GDP growth at 3.6% for the period 1986-2004. Eighteen years until China pushed up global growth figures – that sounds like a reasonable long term trend line to me – especially since the figure for 2006 was 5.1% (I found out elsewhere).
This lower forecast from the RBA may come as a shock to some experts, but as far as I can tell most recently revised projections put global GDP growth in the low 4%+ figures for both 2007 and 2008 (that is still above trend).
The reason why estimates for this year and next don’t differ substantially is because the final quarter of this year is expected to record some very low figures, with most experts anticipating the US recovery to start in the third quarter next year and continue in the following quarters. This in essence makes for a U-shape between now and the end of next year.
I’d argue that “closer to trend in 2008” is in essence a positive projection with the RBA banking on the fact that those economists who’ve penciled in growth to fall towards 3.0% GDP growth next year will be proven too bearish – but it does signal global growth may turn out weaker next year than already lowered expectations.
However, the skeptics will no doubt argue that central bankers tend to err on the positive side and the fact that the US Federal Reserve went on hold after the interest rate cut in October is a fine example of this. More and more analyses that enter my inbox these days mention the possibility of a 50 basis point cut next week – if true this would be one of the most remarkable policy shifts in Fed history, no doubt.
The same skeptics might as well include last month’s RBA meeting with the released Minutes revealing the Australian monetary decision makers thought at the time (one month ago) that global economic growth would still be “well above the average of the past three decades” in 2008.
The global GDP forecast at the time? 4.75% – and that was already 50 basis points lower than in July.
Maybe that’s the real story that emanates from today’s RBA announcement. We should probably no longer consider the rate hike in February as a given.
Oh and yes, Goldman Sachs’ Abby Cohen has calculated that US shares should generate a return of some 13% in the year ahead.
But it all starts with another interest rate cut in the US in five days from today.
Till next week!
Your editor,
Rudi Filapek-Vandyck
(as always supported by the Fabulous Team of Greg, Joyce, Grahame, Pat, George, Chris, Sophia and Paula)
