Australia | Jul 03 2008
By Chris Shaw
The US economy may have narrowly avoided sliding into recession this quarter but the Australian economy may not be so lucky in coming months according to TD Securities global strategist Stephen Koukoulas, who suggests the latest economic data signal the Australian economy might be on the edge of a contraction.
As Koukoulas notes the latest Australian Manufacturing PMI Index reading was a decline to a reading of 47, the fall putting it below the 50 point level that is the cutoff between expansion and contraction and indicating the combination of tight monetary policy and an overvalued Australian dollar is hampering manufacturing activity in the economy.
As well, yesterday’s retail sales data did little to suggest the consumer side of the economy is much stronger as while the figure was better than the market had expected, Koukoulas notes it came after falls in the four previous months. He points out retail sales growth is now running at a rate of around 0.1% per month while inflation is growing at 0.2-0.3%, meaning retail sales volumes are actually falling.
Additonal data this morning are painting an equally bleak picture, as the Commonwealth Bank – Australian Industry Group (AiG) Performance of Services Index also turned lower in June, falling 4.3 points to a reading of 45.4, which also sees it below the 50 point cutoff level signalling contraction.
Activity levels expanded in only two of nine sectors in the month in seasonally adjusted terms, down from four sectors posting gains last month. Transport and storage recorded the largest falls but declines were also recorded in the retail and wholesale trade, personal and recreational services, accommodation, cafes and restaurants, finance and property and business sectors, while only the communication services and health and community services sectors posted gains.
Sales gained in only two sectors compared to five last month and capacity utilisation also declined, down to 76.2% from last month’s 78.1%, while Victoria was the only state to register a growth in services in the month.
Commonwealth Bank chief economist Michael Blythe suggests the readings highlight the contradictory forces at work in the Australian economy at present, with the negatives clearly having the upper hand. While some positives remain and there should be a boost from higher commodity prices these are being offset in his view by the restrictive impact of higher interest rates and oil prices and falling levels of business and consumer confidence.
AiG chief executive Heather Ridout agrees, noting the falls in the PSI are now broadly based throughout the economy, while the pressures on household and business budgets are likely to force down both discretionary spending and investment and new project expenditure.
Further bad news comes from the fact input costs are growing at their fastest rate in the history of the survey on the back of higher oil prices, a trend that doesn’t appear likely to turn around anytime soon.
According to Koukoulas the combination of weak economic data leaves the economic outlook as quite precarious, meaning there is a strong chance of the Reserve Bank of Australia (RBA) commencing a rate cutting cycle before the end of the year.
On his estimates if the recent trend of weaker data continues there is scope for either two 25-basis point cuts or one 50-basis point cut in coming months.