RBA Cuts, Now For Growth

Sydney, Sep 3, 2008 (ABN Newswire) - The Reserve Bank cut the cash rate yesterday because it can see the economy is slowing, led by domestic demand.

But that isn't as cut and dried as it seemed in the wake of the August 5 meeting of the RBA and then a series of poor figures for June.

Instead of gloom and doom, as portrayed in the National Australia Bank's survey (and other business surveys) and in the various consumer sentiment surveys, there's a bit of evidence around that economic activity hasn't as damaged by high interest rates as we thought and that while stockmarket activity has suffered from the credit crunch higher oil and commodity prices have also cut demand, a recession is nowhere in sight.

We will get a lot more clarified by the June quarter national accounts out at 11.30 am today, but those folk wanting to see a sharp dive in activity, the debt burden bringing the house down, not to mention the 'we'll be rooned' jottings of some commentators, will be disappointed.

Subject to the impact of yesterday's mixed Government finance figures for the June quarter (which can also influence the growth numbers in a significant way, especially infrastructure spending) a picture is likely to be painted of an economy which has been slowed from annual growth of more than 5% at the end of 2007 to just under 3% now.

Which is just what the Reserve Bank set out to do in August of last year when it gave us the first of four quick rises of 0.25%. Now it has taken one of those away.

The RBA cut for the reasons contained in this paragraph:

"Weighing up the available domestic and international information, the Board judged that there was now scope for monetary policy to become less restrictive. 

"The Board will continue to assess prospects for demand and inflation over the period ahead, and set monetary policy as needed to bring inflation back to the 2-3 per cent target over time."

Notice (see below) how that's different to what was said previously with the slowing in demand now acknowledged as having happened, and to continue to happen, rather then being prospective.

Notice also the above paragraph does not rule out a rise in interest rates if inflation proves to be embedded and pestilent.

Today's National Accounts could very well be a negative figure for one measure of growth, GDP-E, or Gross Expenditure. But the income side (GDP-I) will be strong, probably much stronger as the company profits figures yesterday showed, with wages and salaries also stronger as well. 

Overall GDP could actually be a bit lower simply because of the lower spending, but the Production measure will also be stronger.

If there is a negative figure for expenditure you can bet excitable Brendan Nelson will grasp it, desperate as he is.
But a negative figure will merely be confusing, not conclusive and you can bet that with revisions in the March quarter figures (0.6% for the quarter, 3.6% annual), the overall rise in GDP for the year could be a bit better than previous thought.
Certainly there won't be any sign of recession, incipient or otherwise, or what Messrs Nelson, Turnbull or others might claim.

There's too much money pouring into the economy from higher iron ore and coal exports, as the $7 billion improvement in the current account and our trade performance in the June quarter showed.

On top of that there were enough positive business indicators released on Monday; such as sales, wages and salaries, profits and perhaps inventories (although that could be an overall negative) to raise the question, is the economy slowing universally, or is the sluggishness patchy?

The latter would be the best argument, especially after a number of analysts expressed surprise at the strength shown by some of the business indicators released on Monday.

Last week it was the surprisingly strong new capital spending in the June 30 year and the sharp improvement forecast for 2009, despite a slowing global economy, credit crunch, falling prices and worries about whether China would continue expanding strongly.

Even though business borrowing has been falling, the investment plans haven't reflected that cutback.

It wasn't a bad shock: more one of those pleasant, 'ohhs' when you realise that the negative thoughts about something have been made to look a bit overblown by reality. Forecasts of a surge in capex in the economy to well over $100 billion by the end of this financial year (and an annual rate of $120 billion possible by the June quarter of 20090) changed a lot of thinking about the outlook.

The RBA has slowed the domestic economy, but possibly not by as much as previously thought, or by what is showing up in those sentiment surveys or the retail sales or building stats.

Corporate profits outside mining (as well as in mining) and sales in non-resource sectors were stronger than expected. Wages and salary growth might have been up 7.3% in the year to June, but they were only up 2.3% in the June quarter and no one looking at the figures yesterday talked about 'wages explosion shock/looms'

Goldman Sachs JBWere remarked:

"We were surprised by the healthy volume-led profits reported outside the mining sector.

"In particular, higher sales volumes in the property & business services (+2.1%qoq), construction (+8.7%), wholesale trade (+1.1%), retail trade (+0.8%), and transport sectors (+1.2%) are at odds with the very sluggish conditions reported across many business surveys.

"June quarter GDP forecast: Our Q2 GDP forecast is unchanged and we continue to look for a 0.2%qoq rise in aggregate activity in the June quarter - the weakest quarterly outcome in 5½ years.

"As we expected, surging mining profits (+40.5%qoq) underpinned the overall rise in the quarter, as higher contract prices for bulk commodities were incorporated into the official data.

"However, profit growth in other industries was also (surprisingly) strong in the quarter, particularly construction (+20.4%qoq), manufacturing (+14.6%qoq), retail trade (+7.7%qoq) and transport & storage (+2.4%qoq).

Merrill Lynch said:

"The data was a mixed bag from the perspective of the June quarter GDP data. Both net exports and inventory changes have subtracted more from growth than we had previously expected.

"The gross operating surplus of non-financial corporations will, however, be significantly stronger, notwithstanding the GDP profit data will adjust for the mining inventory revaluation, which helped boost the gross profits reported in the BI report.

"In light of the data, we are nudging down our GDP forecast for Q2 to 0.3% (from 0.4%). Annual GDP growth should still be near 3%, given likely upward revisions to Q1 growth."

And UBS said:

"Sales rose a solid 1.6% - the best since Q107 - helped by mining, but with strength elsewhere, hinting at a strong GDP(P) result.

"Company profits rose by 14.3% in Q2 (UBS +8.0%, mkt +2.3%), pushing the y/y pace to 21.5%. Profits surged in mining (largely due to the jump in bulk commodity prices), but also rose strongly across manufacturing and construction. The data points to a 10% rise in profits in the GDP accounts due on Wednesday.

"Overall, the "data show a weaker than expected stock-build which will subtract quite a bit more from (the expenditure side of) growth than we'd expected in Q2. However, the net export drag was slightly less than we'd thought, while the profits were broadly in line.

"Together with strong Q2 wages and 'real sales' data for the quarter, this suggests modest growth in GDP Income and solid growth in GDP-production will likely offset flat, if not negative, GDP Expenditure for the quarter.

"Ahead of today's 'public demand' data which could potentially swing estimates of GDP noticeably, we are reducing our forecast for Wednesday's Q2 GDP print to 0.2% (was 0.4%).

"We nonetheless still see some downside risks to that forecast, and as we noted in our weekly, the risks of a negative for Q2 persist."


 

AIR publishes a weekly magazine. Subscriptions are free at http://www.aireview.com.au