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Life Aint Easy At The RBA These Days

Australia | Jun 12 2008

By Rudi Filapek-Vandyck

Waterhouse Global Strategist Stephen Koukoulas has been the author of
some of the most gloomy outlook reports on the Australian economy in
the recent past. No wonder, TD Waterhouse is anticipating interest
rates will no longer go up and the next move will be down. Up would
only exacerbate the trend that is increasingly becoming visible: a
severe slow down for the Australian economy.

This morning
Koukoulas sent around a report called “Reminiscing about
the Early 1990s Recession”. No prizes for guessing the reasons behind
why Koukoulas decided to look back at his early carreer years at the
Federal Treasury. Similar to the lead into the 1991-1992 recession in
Australia policy makers are once again dismissing forward looking
indicators that are pointing into the direction of economic hardships

Spare a few moments for Koukoulas’ flashbacks. In the early 1990s,
recalls Koukoulas, “the monetary policy setting group looked at the
current account deficit (yes, this was a target for monetary policy 20
years ago) and historical inflation, which meant it was very reluctant
and therefore slow to ease monetary policy even though business and
consumers were screaming about the economic pain that was becoming
sharper as the wheels fell off.”

“Policy makers at that time also got blind-sided by a couple of
‘surprisingly resilient’ GDP reports from the Bureau of Statistics
which lead them to view that that things aren’t half as bad as the
surveys and anecdotes were suggesting.  Alas, those
‘surprisingly resilient’ GDP reports were subsequently revised lower –
to the point that confirmed that the economy was indeed in recession a
quarter or so earlier than the data originally suggested.”

“Back in 1989 and 1990, it was also the case that the world economy was
slowing, but because Australia’s export links were so closely tied to
the miracle economy – Japan it was then – and the rest of Asia was
strong and growing, the slump in business and consumer sentiment was
put down as self interested groups complaining about a short period of
economic hardship or a partial reversal of the excesses of the
1980s.  What’s more, the labour market was tight, there were
fears of wages accelerating and the fall in house prices was merely a
welcome correction to what had been a frenzied house price bubble in
1987, 1988 and 1989.”

Sounds familiar?

Says Koukoulas today: “What’s worrying now is that the household debt
to household income ratio is now around 165% (it was under 50% in 1990)
and 12% of household disposable income is used to service that debt (it
was 9% in 1990).  With mortgage rates up 150bps or more in the
last year, the consumer sector is under the pump as it uses money for
debt servicing and not consumption.”

Turns out Koukoulas could have hardly picked a better timing to publish
his flashback: on the very same day the Australian Bureau of Statistics
revealed employment in May fell for the first time in 19 months.
Economists had predicted a rise, so you can imagine the head scratching
that is currently going on through the country.

According to the ABS, employment fell by 19,700 in May with full-time
jobs down 10,400 and part-time employment down 9,300. The unemployment
rate was stable at 4.3%. The participation rate fell from 65.5% to

Economists, in their initial responses to the surprising fall, maintain
there’s no need for panic of any sorts, but one would have to be a real
hardliner on interest rates and inflation to not acknowledge the odds
have shifted further in favour of the Reserve Bank of Australia leaving
interest rates on hold for the time being. Certainly, ANZ’s prediction
of two more hikes before year end seems less plausible as weaker
economic indicators see the light of day, though some economists,
including CBA’s Monica Eley, maintain there remains a greater than 50%
chance the RBA will lift official interest rates again in 2008, taking
the cash rate to a likely cyclical peak of 7.50%.

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