Australia | Mar 03 2009
By Greg Peel
The clues to the Reserve Bank not cutting the cash rate today were apparent in governor Glenn Stevens’ testimony to parliament last month:
“A very large easing of policy has been put in place, on the basis of the anticipated effects of the global downturn and more risk-averse behaviour at home. Those effects are yet to be seen in many of the figures, though they are being felt in businesses around the country. The effects of the policy adjustments are only beginning.”
“So in evaluating the information we receive in the months ahead, our task will be to distinguish between that which confirms the anticipated trends to which we have already responded, and that which tells us something genuinely new about the prospects for demand and prices over the medium term. Our objective, however, remains the same: sustainable growth and low inflation.”
Having cut aggressively, to the initial surprise of many economists, from 7.25% to 3.25%, the RBA was saying above that monetary policy had shifted from being reactive to the global financial crisis to being proactive. The RBA had now run ahead of the kicker in anticipation of the cross-field speculator. The bank was ready to see what effect the aggressive easing would have on the economy – and these things take a while to play out – before making the mistake of erring too far to the downside. The board was ready to assess the situation but act only if conditions deteriorated markedly further.
The summation of conditions since a couple of weeks ago is clear:
“In Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere.”
And thus:
“In response to that outlook, there has already been a major change in both monetary and fiscal policy.”
Hence no rate change needed. It is likely the board had already reached such a conclusion before the release of this morning’s economic data, but this morning’s surprising releases would have helped to seal the deal.
Economists were expecting up to a 0.6% fall in retail sales in January following the 3.8% surge in December, which was all about spending the first round of Pennies from Kevin before Christmas. Would there be anything left over for the January sales? Clearly there was – the January figure showed a 0.2% rise. This leaves the running 12-month growth at 5.9% which is rather impressive in a GFC.
Nevertheless, ANZ notes the rise was all about food, as ex-food sales fell 0.6%. This is mostly to do with higher prices, as even expenditure in cafes and restaurants rose, and anecdotally patronage is falling in such establishments.
The real shock, however, was an extraordinary drop in the current account deficit. The CAD fell by $3.0bn to $6.5bn in the December quarter, driven by the biggest trade surplus Australia has seen since records began being kept in 1959. This does not reflect an increase in exports – for we all know that demand for Australia’s export commodities has crumbled – but rather an large drop in imports (6.8%) which far exceeded a drop in exports (0.8%). The fall in the Aussie had a lot to do with the disparity.
The trade balance, or imbalance as the case may be, is expected to add 1.5 percentage points to GDP growth in the fourth quarter. This has forced economists to quickly revise GDP expectations from a slight contraction to slight growth. ANZ is now expecting 0.1% growth, TD Securities 0.4% and Westpac 0.5%.
Not exactly champagne stuff, but when you consider the US economy contracted by 6.8% in the same period and Japan by 12.7%, and figures for the UK and Europe out this week expected to be ugly, then Australia is standing as a beacon. (Australia’s GDP will be released tomorrow.)
Economists don’t, however, expect such success to last. One glaring factor within the current account figures was a very low level of government spending, and we know that’s all about to change. Westpac still expects an overall economic contraction in 2009. ANZ notes that the official result for third quarter GDP was 0.1%, but the number is open to revision on the announcement of the fourth quarter figure. If Q4 doesn’t see contraction, a revised Q3 might. Either way, if Q4 does come in as positive then we will need to see both Q1 and Q2 of 2009 contract in order to technically call a recession, although such a look-back definition is a load of old bollocks anyway.
A recession is what you have when you think you’re having a recession.
Westpac notes that job ads were down 27% in the second half of 2008, dwelling approvals down 26%, non-residential approvals down 40%, business confidence has fallen to the lows of the previous decent recession and surveys suggest businesses are set to cut back on investment. There’s your recession signpost right there, amongst that lot.
Economists still suggest further cash rates will be forthcoming as the Australian economy begins to show signs of recession. But for now, we can all have a little rest please.