Australia | Nov 10 2008
By Andrew Nelson
After weeks of she’ll be right commentary that was in direct juxtaposition to the development of an extreme easing bias, the Reserve Bank of Australia came clean today, confirming in its Statement on Monetary Policy in no uncertain terms the pace of Australian economic growth will slow markedly over the next months, even years. The central bank has officially shifted its focus from inflation to growth and/or the lack of it both in Australia and the wide world around.
The RBA confirmed its re-prioritisation of inflation as a topic of concern. Just a few months ago inflation was about all the bank said it was worried about. Back in August, the issue was in the first paragraph of the statement, today it wasn’t mentioned until fifteen paragraphs in. It’s all about battling the global slowdown now, with the central bank confirming the outlook for the Australian and world economies has changed significantly since August. Clearly, downside international and domestic growth risks have eclipsed the central bank’s earlier 2008 concerns about elevated inflation.
In fact, RBA officials do not expect inflation to be back within the 2-3% target range until 2011. Currently, the underlying inflation expectation is at 4.5% for this year, 4% to June 2009 and 3.5% to December 2009. These numbers compare to earlier forecasts at 4.5%, 3.75% and 3.25%, respectively. The RBA does expect inflation will return to its target band, but the timetable for the expected decline back to its 2%-3% target range has been pushed out six months to December 2010.
The fact that inflation is still high and will stay so longer than previously hoped, remaining above the RBA’s comfort level for some time to come, still comes second in consideration to the broader economy. This shows just how concerned the RBA is with putting the brakes on this domestic economic slowdown. Commonwealth Bank Senior Economist John Peters thinks the RBA’s stance on inflation is that domestic spending growth will now slow to such an extent that it will produce a significant reduction in inflation, so lower cash rates are not only possible, but desirable.
Diving straight in to look at the numbers and the central bank has lopped half a per cent of its August growth forecasts and even more off the next two halves. The RBA is now predicting annualised GDP growth of 1.5% for 2008, 1.5% to June 2009 and 1.75% to December 2009. The previous forecast was for 2%, 2.25% and 2.50% respectively. These revised projections compare to the IMF forecast from last month of FY09 growth in the region of 1.8% and the recently updated Australian Federal Government’s prediction of 2% GDP growth for fiscal 2009.
Among other things, the RBA’s technical assumptions include an Aussie trading at around US70c, a cash rate at 5.25% (current), and WTI crude oil price at US$70 per barrel. Given the cash rate and oil are expected by most to ease in the short-term, there could be a little wriggle room, but taking the bank’s message as a whole there appears little room for near-term optimism.
In a departure from its softly, softly language, the RBA has this time come out and said what we all know to be the case, the worsening global economy and sharp falls in commodity prices will see the pace of economic growth slow throughout Australia. The central bank confirmed the belief held by many in the market that global commodity prices have peaked as have the prices that Australia gets for its exports. While the central bank admits the fall in the AUD versus the USD will continue to offset some of the downside, it won’t be that much.
In fact, the central bank doesn’t expect the pace of economic growth to pick up until the end of 2009, when it is expecting GDP growth to head back towards 2.5%.
The central bank has highlighted the slowdown in growth in household spending, lower borrowing by both households and businesses, weaker conditions in the labour market, and what is expected to be a significant scaling back of previously upbeat business investment plans. The increasing difficulty firms are having in obtaining credit is also biting hard and will remain a significant impediment to business spending for some time.
Having acted so assertively over the first stage of the easing cycle, JP Morgan analysts expect the RBA will probably move more cautiously from here on out than has been the case so far. That said, the consensus view (including JP Morgan) is for another 50bp cut in December, with at least a couple more cuts to follow in 2009.
The broker thinks that despite the big and brave moves from the RBA, we’re still looking at an Australian recession, but a “mild” one. The big cuts and the government’s fiscal stimulus will help, but the rest of the world is in too bad a shape for Australia to remain unscathed. Policy support does work, says the broker, and with responses already in place, a weak AUD and an expected rebound in global growth later in 2009, JP Morgan believes this recession will be short and shallow in Australia.