Australia | Sep 03 2008
By Chris Shaw
The Australian economy continues to avoid a recession, this time scratching out a 0.3% increase in GDP in the June quarter. The outcome was only slightly below market expectations of an increase of 0.4%.
Despite the lower than expected outcome, TD Securities senior strategist Joshua Williamson regarded it as a solid result overall, highlighted by the economy’s re-balancing away from household consumption to business investment and exports as the main drivers.
Westpac’s economics team agreed and suggested the data shows the continued two-speed nature of the Australian economy, a trend it expects will continue for some time. But such an outcome is not so bad according to ANZ Bank senior economist Katie Dean, who suggests the Reserve Bank of Australia (RBA) won’t be too unhappy with today’s figures as they show the economy didn’t fall of a cliff, while also offering some early signs inflation pressures are stabilising.
Commonwealth Bank chief economist Michael Blythe is not so sure though, taking the view that some of the inflation indicators in today’s data indicate inflationary pressures remain uncomfortably high. As a result, he expects the RBA will look to take its foot of the brake slightly, but won’t be stamping on the accelerator and attempting to encourage too strong a pick-up in growth.
In Dean’s view, the data means the RBA won’t be required to make any further reaction immediately, particularly given upcoming employment and retail sales data will provide further detail on the health of the economy overall. But as Williamson points out, today’s data is at least two months out of date and conditions have tightened further since then, so more rate cuts by the end of the year are likely.
He expects a further two cuts, suggesting it will take this much for households to regain some confidence in their financial positions. Certainly the sector is lacking confidence at present, as today’s growth data showed a 0.1% decline in household consumption against a 4.6% increase in private business investment. As Williamson notes, this rebalancing is necessary, as it is helping to keep a lid on inflationary pressures.
While a further two rate cuts are still likely this year, with the first expected at October’s RBA meeting, Williamson’s conclusion from today’s data is the pace of future cuts will be slower than the market had been anticipating. The most likely outcome is a cash rate of 6.5%-6.75% by the middle of next year, in his view.