Australia | Oct 30 2008
By Chris Shaw
While a global recession is now expected by many market commentators, the Reserve Bank of Australia (RBA) is not sure this will actually extend to the Australian economy. Comments from RBA deputy governor Ric Battellino indicate the central bank can see nothing in the data at present to indicate anything more than a slowdown is likely, though with a number of external forces impacting, risks remain.
But that may not be the only expectation the market has wrong, as Commonwealth Bank senior economist Michael Workman notes the market is currently factoring in an official interest rate of just 4.0% by May of next year, but this may not be achieved.
As Workman points out, Battellino sees the RBA as currently being limited in its options with respect to cutting interest rates because of Australia’s relatively high inflation overhang, which isn’t expected to return to its target range of 2-3% until late next year or early in 2010.
Workman is forecasting a rate cut next week to 5.5% before further cuts to bring rates to 5.0% by early next year as the RBA eases policy to stimulate economic activity. ANZ Bank economist Riki Polygenis also sees rates coming down 0.5% next week, with rates to come down to a neutral level by early in 2009.
According to Polygenis, today’s comments by Battellino are designed to restore some confidence in the economic outlook in Australia, as the point was made the domestic economy is not in as bad a shape as the US especially in relation to the respective household economic positions in both countries. While Battellino indicates this should remain the case, Polygenis is a little more cautious, pointing out the downside risks to employment growth means it is prudent to remain conservative with respect to the outlook for household spending.
Also supportive is the fact the Australian housing market is in better shape than its US counterpart. There is not the same oversupply in the Australian market and Australian borrowers also have a much greater capacity to repay their loans, as much of the surge in the sector has been due to trading up rather than new marginal buyers.
As well Battellino suggests, Australia can take some solace from the fact that 80% of exports now go to Asia and here the growth outlook remains healthier, especially as while China’s economy may slow, it should still produce solid demand for Australian resource exports.
Exposure to a slowing global economy remains a potential issue though and TD Securities senior strategist Joshua Williamson suggests as a result, rates will come down for some time, with his target being an official cash rate of 4.0% by the middle of next year.
This won’t prompt strong growth however, as on Williamson’s numbers Australian GDP growth will slow to 0.9% by the end of March next year before recovering only modestly to growth of around 2.0% by the middle of 2010, as it will take some time to fix credit markets and this needs be done before the global economic growth problem can be addressed.