Australia | Jun 03 2008
By Greg Peel
The 7.8% jump in building approvals in April announced this morning provided for a bit of a jump in the Aussie dollar ahead of the release of the RBA’s monetary policy decision for June. Could it be the central bank would raise the cash rate after all?
It wasn’t to be, and when one puts the building approvals figure up against yesterday’s fall in retail sales it at least appears like a cancel-out. Except that the building approval jump can almost entirely be put down to rain in Queensland.
Economists point out that this particularly hefty monthly jump – and bear in mind the building approvals number can be very volatile at the best of times – was very much influenced by big jumps in Queensland approvals following a period of torrential rain. National approvals were down 5.5% in March. So we can’t read too much into that one, and Commonwealth Bank, for one, suggests building approvals are really just in a sideways range with a few blips up and down. The economists suggest this will last for a while yet.
The first quarter current account deficit was also weather-affected, such that the 4% increase featured a 6.2% increase in imports – now cheaper due to a strong Aussie, against only a 4.2% increase in exports, which were affected by capacity constraints and weather delays. A 6% improvement in the net income deficit made up the difference. Dorothea Mackellar would no doubt agree with economists that getting Australia’s current account deficit to come down is no mean feat, despite the RBA warning of an upcoming significant improvement in the terms of trade.
The reason the RBA warns of such an improvement is because the additional income is inflationary, and this poses a threat to the apparent success the central bank has had to date in slowing the domestic economy via interest rate rises. The recent retail sales and credit growth data bear witness to this success.
More testament is provided by the latest update on the first quarter GDP growth figure, which now looks like being a mere 0.2%. This translates to an annual growth rate of 2.8%, which is a long way down from the annual rate of 3.9% registered in the fourth quarter 07.
In the accompanying statement released today when the RBA again left rates unchanged at 7.25%, Governor Stevens again warned about the growing terms of trade. Indeed, the statement was basically a complete rehash of the May one, so there’s nothing new to consider. Wage claims remain a threat, financial markets are slowly stabilising, and inflation remains an overall threat which the bank will carefully monitor.
At this stage economists are split between those expecting another 25 point hike in August following the CPI number, and those suggesting a slowing economy will reel in inflation and commodity prices are due for a speculative pullback. This school is still looking towards the end of the year for a rate cut.
At the end of the day it will simply depend on the data. Anything can happen and probably will.