Australia | Sep 01 2008
By Chris Shaw
A rate cut of 0.25% when the Reserve Bank of Australia (RBA) meets tomorrow is considered a virtual certainty, but those hoping for quick follow up cuts in coming months may be disappointed. Economic data released today show some parts of the Australian economy are still enjoying a strong boost from the commodities boom.
While an improvement in export sales and Australia’s terms of trade produced a current account surplus, the big surprise for economists was company profits, which rose in the June quarter by a whopping 14.3% compared to a market consensus forecast of an increase of around 2.75%.
As ANZ senior economist Katie Dean notes, the surprising element of the increase was it was not driven solely by the mining sector, as a number of industries recorded gains of more than 10%. As an example, she points out while mining profits rose a little over 40%, while construction profits were up by 20.4%, manufacturing profits increased by 14.6% and even retail trade profits rose by better than 7.5%.
Even allowing for some gains from inventories, she notes the result was an increase of 10% for the quarter, which is a solid result given the tougher economic conditions at present. While Westpac had forecast a 6% increase, the bank still sees the data as meaning there remains downside risk to June quarter GDP growth, as having forecast an increase of 0.5% the bank can now see 0.4% as a likely outcome in real terms given expenditure remains weak.
But Dean disagrees, and suggests the growth risk for the period is now to the upside.ANZ has lifted its forecast to 0.5% while expecting some in the market may forecast growth of as high as 0.7% on the back of the company profit numbers.
Commonwealth Bank economist James McIntyre suggests the profit data can be partly explained by companies enjoying lower input costs from the higher dollar, which appears to have been enough to offset increased competition from cheap imports in sectors that surprised, such as manufacturing and construction.
He also suggests the data indicates government tax flows remain solid, which means there is scope for additional stimulatory fiscal measures to be introduced if the economy appears likely to slow too much. To reflect this, McIntyre is forecasting growth for the June quarter of 0.4%, which would translate into annual growth of 2.9%.
As to how this impacts on the RBA’s decision making process with respect to interest rates, ANZ’s Dean suggests the stronger than expected data today indicates the economy hardly slowed at all in the second quarter, which should ensure the RBA remains very measured with respect to cutting rates further in coming months.
TD Securities senior strategist Joshua Williamson agrees, suggesting today’s company profit data implies GDP growth is shifting from consumer driven to being driven by business investment and external sources. Post the numbers today he expects June quarter GDP to increase by 0.5%, and when taken together with ongoing inflationary pressures in the economy, he sees the market’s previous expectations of as many as five interest rate cuts over the next seven months as likely to be tempered somewhat.