Australia | Nov 10 2009
By Rudi Filapek-Vandyck
Economists may not be all convinced just yet, but investors and homeowners in Australia should prepare for another rate hike by the Reserve Bank in December. The reason? Indicators for underlying strength in the domestic economy continue surprising to the upside.
Certainly today’s release by the National Australia Bank of its monthly survey into business confidence and business conditions has added another strong argument in favour of the RBA continuing its path of gradual interest rate hikes, without a pause in December.
In fact, the confidence numbers in the survey are so high that one would almost feel inclined to think they might well turn out to be a contrarian indicator instead of an accurate gauge for the immediate outlook for businesses in Australia.
The bottom line is, however, that it would seem the RBA’s concern about spare capacity in the Australian economy being used up at a faster pace then previously thought possible, is looking like it is going to materialise. If anything, this will make decision makers at the Reserve Bank increasingly uncomfortable with the current very accommodative low level of official interest rates.
A similar view was echoed by economists at ANZ Bank and Westpac following the surprisingly strong and upbeat October NAB business survey. Suggest economists at ANZ bank: investors should watch the next update on labour market capacity. Any significant fall in the unemployment rate would virtually secure a December rate hike is on the cards.
Australia’s unemployment data for October are due for official release this Thursday, November 12th, on the same day a handful of indicative data will be released in China. Present market expectations are for very strong Chinese data.
Economists at Westpac point out the NAB survey is yet another indicator that current forecasts for economic growth in Australia next year are likely to turn out too low. Westpac’s forecasts are higher than most others in the market, including the federal Government and the RBA, and the economists see no reason why they will be proven wrong. Quite the opposite, actually.
Having said so, Westpac economists do suggest (in between lines) the October outcome of the NAB confidence survey is likely to be the peak, for now. The question thus is whether the business conditions index will consolidate at its present level in coming months?
If this proves to be the case, that would suggest domestic demand growth will strengthen to around a 5% annual pace. This is at present not something any economist in Australia has been brave enough to pencil in, not even the top-markers at Westpac.
Which takes us back to the question I suggested in the third paragraph of this story: is overall confidence running a bit too high at the moment, or is all this simply a straightforward result of a rapidly improving economy that was in a much direr state only six months ago?
Westpac projects GDP growth to accelerate to about 4% through calendar 2010. The RBA, which is a touch more upbeat than the Government, is forecasting 3.25% growth over this period.
See also “Oz Business Confidence Higher Again In October” published earlier today.