Tag Archives: economy

December 4, 2013 · 1:40 am

Growth numbers suggest Abbott should be careful in cutting

As the Abbott Government’s Commission of Audit hunts for spending cuts and bureaucratic flab, the latest national accounts might give it some pause for thought about how zealous it should be.

The figures show that public spending added a hefty 1.3 percentage points to growth in the September quarter – without this contribution the already decidedly-anaemic GDP numbers (up 0.6 per cent in the quarter, 2.3 per cent for 12 months) would have been much worse.

As the numbers make clear, this is a fragile time for the economy, with a hesitant transition underway from mining investment toward other sources of growth.

Housing activity is strengthening, but the lift in the household savings ratio to 11.1 per cent is a fair indicator that although consumer confidence is improving, people remain cautious. (No doubt the urge to save was heightened by the air of uncertainty that surrounds any federal election, but the tepid labour market is probably a more lasting influence).

There are undoubtedly savings to be had in public spending, but in the zeal to make cuts, the Government needs to keep in mind that the public sector is not just a cost centre – it purchases goods and services, and it employs people, giving them the wherewithal to make their own purchases.

Australia is a long, long way from southern Europe, geographically and economically, but the experience of countries like Greece and Spain show that ill-timed austerity can make things far worse.

  

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December 3, 2013 · 4:15 am

No more rate cuts, but no rush to tighten yet

Interest rates look set to head higher, but the RBA’s “considerable uncertainty” about the pace of recovery in much of the economy means the first rate hike of the cycle could be delayed until well into 2014.

In a widely-anticipated decision, the RBA Board has decided to hold the cash rate at 2.5 per cent – meaning it will have been at this historically low level for six months by the time of the Board’s next meeting on February 4.

There is clear evidence that low interest rates are having an effect.

The property market is strengthening (house prices have risen, building approvals are up 23 per cent from a year ago), company profits are growing (up almost 9 per cent in 12 months), shares are rising (up 20 per cent in the year to date), and retail sales are increasing at a sustained solid clip (three consecutive monthly increases of 0.5 per cent or greater).

And the central bank thinks there is more of such news to come.

As RBA Governor Glenn Stevens put it today, “The full effects of these decisions [to ease monetary policy] are still coming through, and will be for a while yet”.

This is coupled with tentative signs that activity in the non-mining parts of the economy is picking up.

Official capital expenditure data showed manufacturers and other businesses were gradually increasing their investment, and the latest report from credit reporting firm Dun & Bradstreet showed 10 per cent of firms intend to hire extra staff in the first quarter of 2014.

If this is accurate, and businesses act on their hiring intentions, the unemployment rate may not rise much higher.

In further promising news, the official GDP numbers for the September quarter, due out tomorrow, may also be a bit stronger than many have been predicting.

The Australian Bureau of Statistics threw in a surprise today with its report that the trade surplus surged more than 50 per cent in three months to almost $9 billion, adding around 0.7 of a percentage point to activity in the September quarter.

The RBA’s known unknowns: the dollar and non-mining activity

But the persistently strong dollar and the sputtering recovery in economic activity outside the mining sector are the two greatest areas of uncertainty for the Reserve Bank.

Continuing recent efforts to talk the currency down, Stevens said the dollar (which was trading at just below US91 cents following the RBA announcement) was “still uncomfortably high”.

He almost didn’t need to add that the high exchange rate will have to come down in order for the economy to achieve “balanced” growth.

On this front, the Governor admitted that expectations for an acceleration in activity outside the mining sector were subject to “considerable uncertainty”.

Market Economics managing director Stephen Koukoulas is one of the few who for some time now have been predicting rates to rise in 2014 – he tips in the first three months of next year.

But the strong dollar could make it hesitate.

Koukoulas, for one, thinks there is much more the RBA needs to do much more to get the currency down – jawboning alone has had little effect.

If he is right, look for big sell-offs of the currency in coming days.

 

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July 31, 2013 · 1:48 am

Yes, you heard it right: RBA says embrace risk

It is not often that you hear a central banker urge people to take on risk.

But that was the unexpected pitch from Reserve Bank of Australia Governor Glenn Stevens yesterday as he pondered where growth would come from now that the mining investment boom has all but ended.

In an intriguing passage in his speech to the Anika Foundation in Sydney, Stevens made it clear that nervous savers were in the policy sights of the central bank.

He said that, in lowering interest rates, it had been the RBA’s intention to prod nervous savers into backing out of increasingly expensive safe havens and instead start searching for growth.

As the Governor put it, “One of the things we have been watching for as we have been reducing interest rates has been an indication of savers shifting portfolios towards some of the slightly more risky asset classes, as that is one of the expected and intended effects of monetary policy easing”.

So there you have it, an endorsement from the RBA to take on more risk.

Australia’s central bank, like many others around the world, has done much of the policy work to support growth as governments have concentrated on budget repair and businesses have shied away from debt.

In comments that have imparted fresh momentum to rate cut speculation, Stevens said there was no “serious impediment” to easing monetary policy from its already “very accommodative” setting of 2.75 per cent.

Following his remarks, markets put the odds of a cash rate cut to 2.5 per cent when the RBA Board meets next Tuesday at 94 per cent.

But by his own admission, the Governor is unsure this will be enough to bring about a vital turnaround in confidence.

“It is somewhat concerning that the business community’s confidence has been quite subdued in recent times,” Stevens said. “It would be good if there was a bit more confidence in the business community about the future. Unfortunately…there’s no such thing as a ‘confidence policy lever’.”

The dour mood of business has meant investment in the non-mining sector remains soft, raising the prospect that economic activity – already below average – will slip even lower as the investment phase of the mining boom peters out.

It has also meant that funds that might otherwise go into productive investments have instead been locked up in conservative low-growth but relatively secure assets.

As Stevens said, this has come at a cost to both investors and the economy: “With many investors wanting safety, the price of safety has risen”.

Flagging that more rate cuts may be on the cards, he warned the price would probably have to rise even higher to encourage more adventurous use of funds.

“It [the price] has to rise by enough to prompt at least some people to start to shift their portfolios in the direction of taking some more risk – by holding equities, physical assets and so on, though obviously we don’t want too much risk-taking,” he said.

When even a central banker is urging investors to take a few more chances, you know the flight to security has gone too far.

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