Australia | Jul 31 2008
By Greg Peel
It was the Reserve Bank of Australia’s intention to slow the domestic economy in order to fight runaway inflation, and it’s working. In fact, even the RBA is probably surprised just how quickly it’s working.
After a recent slew of data showing more rapid slowing than economist consensus had estimated, today’s retail sales growth figure was no exception. Economists had decided the June number would probably be flat this month, after they were surprised by a (now upwardly revised) 0.9% jump in May. But May was quickly wiped out, as the June growth figure came in a negative 1.0%.
ANZ describes the figures as “awful”. Westpac chimes in with “much weaker than expected”, while TD Securities points out this was the weakest monthly result in six years. Indeed, TD suggests that private household consumption may not now contribute to second half 2008 GDP growth at all, which is more akin to a recession than an economy featuring a positive terms of trade.
We all know the culprits of course – high interest rates, even higher bank lending rates, high petrol prices, and a bad year for super. We have also all noticed the fallout anecdotally – my latest experience being grabbing a regular sushi box for lunch from my local Japanese takeaway just before writing this report, and finding the next door health food shop gone. It feels like a recession in Sydney.
There is a chance the July numbers will look better, given tax cuts arriving, the petrol prices easing, WYD week (did any of them actually spend anything?), and the Olympics demanding new teles, but the fact remains consumers are shying right away from unnecessary purchases. And this is also borne out by today’s private sector credit numbers.
The RBA reports credit growth fell to a six-year low as well in June and now stands at what is a very weak 3.7% annualised. The historical average monthly growth is 13.5%. June growth was only 0.4%, with business credit growing by a mere 0.5%, housing by 0.6%, and “other personal” (think credit cards and car loans) falling by 0.4%.
TD Securities was very vocal about more interest rate rises on the way up, and now it has become equally as vocal about impending cuts, despite most economists agreeing “on hold” had become the more likely scenario. The turn in the economic cycle has been so rapid, TD notes, that the RBA might be forced to take a leaf out of the RBNZ’s book and pull out a “stabilisation cut”.
“Don’t discount a September or December stabilisation cut,” suggests TD, “and even the chance of an August cut should not be ruled out”. Strewth – that would mean next Tuesday.
Other economists are less excitable. Westpac notes that the futures market is factoring in a cut this year, and the economists believe that if this bad data keeps flowing October is not out of the question.
ANZ suggests these numbers provide “more confidence” that we are at the top of the tightening cycle. This is a very dovish statement from ANZ, considering up until recently the economists were fairly adamant about another rate rise before year end, and maybe even two. But they still point to 16-year high inflation as a reason why a rate cut is not just around the corner. They, too, want to see more weak numbers before an easing is on the cards.
What the RBA will have to consider, however, is that the banks are quite likely to go again with their own lending rate increases. Banks care little bout retail sales numbers – they are more worried about the fact their independent rate rises to date have still not covered their increased funding costs, and now that they are writing down more loans they may have to risk even slower credit growth and go for increased income.
This may force the RBA to look more quickly at a rate cut, but let’s not forget the other two main factors – wage claims and the terms of trade. The RBA will not shift rates if every union starts asking for more wages on the back of interest rates and petrol prices. The latest has been the emergency services unions, but at least they were only asking for a CPI increase. As for the terms of trade, well…
The trade balance improved significantly in June, it was revealed today, and May was also revised upward. June saw a rise of $664m to $411m surplus, from a May deficit of $235m which was revised up from a $965m deficit. The revision is as a result of the lingering process of contract negotiations among coal and iron ore producers, and it’s hard to put a finger on exactly what price rise has occurred for whom and when. So the ABS has decided to take the big coal price increase, as well as the iron ore price increase, back to a nominal April 1, and that’s why the numbers needed to be adjusted.
You can pretty much attribute the surplus to coal and iron ore, although imports fell in June after rising in May.
The falling import result is right up the RBA’s alley, but rising export income is what it was largely afraid of. A strong terms of trade will keep economic growth looking good, and that means a rate cut might not be the best option just yet. (Consider that a rate cut would cause the Aussie to fall, thus making Australian exports cheaper to the rest of the world. But then we’re selling all we can at the moment anyway. The other side is that increased tax receipts feed into the public coffers, providing more spending power.)
So looking at all of this, a reasonable person might suggest the “on hold” call remains for now. But we might just have found the slippery slope. If oil can continue to pull back, which in turn drops food prices, and if the banks raise again, then the RBA most likely will have to act swiftly. Don’t forget that in the history of all mankind, central banks have always, everywhere, and every time, gone one step too far in monetary policy cycles.