Australian Economic Analysis

dhukka · 5 August 2008

I thought I would start a thread on Australian economics. Whilst the Aussie economy gets plenty of play on this forum the actual data coming out of Australia each week doesn't seem to get discussed much on this forum. That may be because it is not as widely disseminated and easily available as the US data or it maybe that noone really gives a toss.

Anyhoo, a couple of pieces of data in recent days on the state of the Australian economy shows little doubt the economy is slowing. Last week, the monthly Performance of Manufactuing Index (PMI) was released and showed contraction in the Australian manufacturing sector for the second straight month.

Today the Performance of Services Index (PSI) was released and showed its second straight month of contraction in the Australian Services Sector. In fact the index hit its lowest level since its inception in Feb 2003. Weakness was broadly based. The employment component plunged 6 points to 42.2, clearly slowing contraction in service sector employment.

Added together with sluggish retail sales, sharply slowing credit growth and business and consumer confidence at lows last seen in the early 1990's, there is little doubt the domestic economy is slowing.

The RBA signaled to the market that interest rate cuts may be not far off in today's statement. As seen below the cash futures market got excited and has now priced in 50 bps of easing by November. The yield curve has well and truly inverted.

The future of interest rates are now headed lower in Australia but how much lower? I think they will go much lower than most expect. No doubt we will get equity market rallies as interest rates are cut but they will suffer the same fate as those in the US. That is, they will fail to prevent the economy from slowing significantly and be unable to prevent equity markets from going lower.

CanOz · 5 August 2008

Great to see this thread Dhukka, I'll be taking a keen interest as long as my access to this site holds up....should be about 30 days from Friday i reckon!

If they do as you feel they may, then the AUD could be in for a slide...unless the US stays on hold or cuts...with energy and commodities coming down, could inflation start to ease globally and in Australia? If not, then the RBA cannot be cutting rates yes?

Cheers,

CanOz

IFocus · 5 August 2008

Good thread dhukka

Currently I cannot see any other out come other than what you have already pointed out.

After the Olympics are out of the way the full effects of prevailing issues world wide will feed back into the Oz economy. This of course will impact on the resources boom which is only now in our materials market starting to price in risk (anyone remember the financial's last year?)rather than speculation.

dhukka · 6 August 2008

CanOz said:
Great to see this thread Dhukka, I'll be taking a keen interest as long as my access to this site holds up....should be about 30 days from Friday i reckon!

If they do as you feel they may, then the AUD could be in for a slide...unless the US stays on hold or cuts...with energy and commodities coming down, could inflation start to ease globally and in Australia? If not, then the RBA cannot be cutting rates yes?

Cheers,

CanOz

From the RBA's perspective, their interest rate rises have worked in slowing domestic demand and with oil and other commodity prices coming down their inflation fears are dissapating. Leaving aside the idiocy of inflation rate targetting, my concern is that they went too far and they will end up slashing rates fairly aggressively into next year to prop up a significant slowdown in the economy.

More data released today showed that credit growth for owner occupied housing continues to contract, the number of loans for owner occupied homes excluding refinancings fell a seasonally adjusted -4.9% in June and represents the fifth straight month of falls. On a year over year basis they are now down -30% whilst the toal value of owner occupied home loans is down -29% year over year.

professor_frink · 6 August 2008

good idea for a thread dhukka, I'll be following along hoping to pick up a few things

Caught the late news last night and the talk was about the possibility of the big 4 not playing ball when the RBA starts cutting. I can't imagine that the RBA is going to be too happy about this, but the question is what could they do if the banks leave their rates the same as they begin lowering?

dhukka · 6 August 2008

Also today, the June Performance of Construction Index was released showing the fourth straight month of contraction although up from the 33 month lows of May. Australian manufacturing, services and construction are all showing contraction. In coming months you can expect that to start showing up in the monthly employment figures.

dhukka · 6 August 2008

professor_frink said:
Caught the late news last night and the talk was about the possibility of the big 4 not playing ball when the RBA starts cutting. I can't imagine that the RBA is going to be too happy about this, but the question is what could they do if the banks leave their rates the same as they begin lowering?

It's an interesting point. Take a look at what happened in the US. 1 year ago an average 30yr fixed mortgage was 6.25% while the Fed funds rate was 5.25%. Today we have a Fed funds rate of 2.00% and what have 30 year mortgage rates done? Currently the average rate is around 6.35%.

That may be a little misleading, whilst the Fed was cutting rates, 30 year mortgage rates got as low as 5.25% but given the slashing of the funds rate mortgage rates hardly budged.

CanOz · 7 August 2008

I have a couple of questions Dhukka...

Given the Big Ben has not really targeted inflation, do you agree with the Fed's monetary policy? Slight off topic, but I'm just curious as he's had allot of critics, and very few supporting his/their policies.

Also, what wrong with the Australian economy contracting? Should we consider this normal? Or do we just want to see the pain minimized? Can a contraction help to control inflation?

Cheers,

CanOz

Real1ty · 7 August 2008

Unemployment rate steady in July
August 07, 2008

THE number of people in full-time employment grew by 53,700 in July putting employment figures at odds with other data suggesting the economy is slowing sharply.

The Reserve Bank of Australia indicated this week that it was on the brink of ending a six-year run of interest rate hikes in light of evidence of an economic slowdown.

The total number of people employed in July rose by a seasonally-adjusted 10,900, but part-time jobs dropped 42,800, the Australian Bureau of Statistics (ABS) said.

The jobless rate was 4.3 per cent, unchanged for the fourth straight month after revisions.

Economists had expected total employment to rise by a slim 1300.

Still, the ABS has warned its jobs series could prove more volatile after it had to cut its labour force sample size by 24 per cent due to the bureau's enforced cost-cutting exercise.

South Australia reported the largest fall in unemployment in July, easing to 4.6 per cent from 4.8 per cent, while in Queensland it declined to 3.7 per cent from 3.8 per cent and in Western Australia it fell to 3.1 per cent from 3.2 per cent.

The jobless rate was unchanged at 4.6 per cent in Victoria, but rose to 4.5 per cent from 4.2 per cent in Tasmania and was up to 4.7 per cent in NSW from 4.6 per cent the previous month.

In the territories, the unemployment rate fell to 2.9 per cent in the Northern Territory in July from 3.2 per cent, while in the ACT it was unchanged at 2.7 per cent for a fourth straight month.

http://www.theaustralian.news.com.au/story/0,25197,24141722-12377,00.html

dhukka · 7 August 2008

Real1ty said:
Unemployment rate steady in July
August 07, 2008

THE number of people in full-time employment grew by 53,700 in July putting employment figures at odds with other data suggesting the economy is slowing sharply.

The Reserve Bank of Australia indicated this week that it was on the brink of ending a six-year run of interest rate hikes in light of evidence of an economic slowdown.

The total number of people employed in July rose by a seasonally-adjusted 10,900, but part-time jobs dropped 42,800, the Australian Bureau of Statistics (ABS) said.

Whilst full-time employment grew strongly in July part-time work took a dive. Part-time employment falls are usually a harbinger of drops in full-time jobs. That said, this is just one month of data so not much can be read into it. Also the abs has revised the way it does the survey for the employment report and has basically reduced the sample size by about 25%. That means the standard error has increased. So basically, less stock can be put in the current months data and more attention should be placed on the revisions.

dhukka · 7 August 2008

CanOz said:
I have a couple of questions Dhukka...

Given the Big Ben has not really targeted inflation, do you agree with the Fed's monetary policy? Slight off topic, but I'm just curious as he's had allot of critics, and very few supporting his/their policies.

Also, what wrong with the Australian economy contracting? Should we consider this normal? Or do we just want to see the pain minimized? Can a contraction help to control inflation?

Cheers,

CanOz

Hi CanOZ, basically I think Helicopter Ben and his Fed mates blinked. They cut rates too far too fast. I was on record as saying 12 months ago that the Fed rate cuts would be largely irrelevent and not prevent the economy sinking into recession. I think the fact that the US economy probably slipped into recession in the 4Q07 or 1Q08 confirms that view. I don't think they should have cut rates at all or at most to about 4%. At 5.25% the Fed was hardly what you would call tight. By slashing rates and trying to reflate the economy the Fed just prolongs the pain. This assymentric approach to monetary policy where they inflate bubbles on the way up but try their best to stop them deflating on the way down is simply madness. If I had to propose an alternative monetary policy it would be abolish the Fed and let the market determine the level of interest rates.

In my view there is nothing wrong with the Australian economy contracting. Despite central banks around the world best efforts they cannot abolish the business cycle. On top of that I earn the vast proportion of my money in yen so I'm hoping the RBA cuts rates aggressively pushing the AUD down.

Yep inflation usually disappates during a recession. Actually I never saw inflation as much of a problem, the bigger risk as I saw it was deflation brought about by a contraction in credit, and falling asset prices.

professor_frink · 8 August 2008

dhukka said:
It's an interesting point. Take a look at what happened in the US. 1 year ago an average 30yr fixed mortgage was 6.25% while the Fed funds rate was 5.25%. Today we have a Fed funds rate of 2.00% and what have 30 year mortgage rates done? Currently the average rate is around 6.35%.

That may be a little misleading, whilst the Fed was cutting rates, 30 year mortgage rates got as low as 5.25% but given the slashing of the funds rate mortgage rates hardly budged.

So what do you think the most likely course of action would be if this happens here? Outside of the govt stepping in and cutting taxes for all to try and stimulate things a bit, I can't think of much

dhukka · 8 August 2008

professor_frink said:
So what do you think the most likely course of action would be if this happens here? Outside of the govt stepping in and cutting taxes for all to try and stimulate things a bit, I can't think of much

If the U.S is anything to go by you probably get some hairbrain fiscal stimulus package that includes rebate checks, corporate tax deductions etc.

CanOz · 8 August 2008

dhukka said:
If the U.S is anything to go by you probably get some hairbrain fiscal stimulus package that includes rebate checks, corporate tax deductions etc.

So why not infrastructure development? Even if its partially/mostly privatly funded? Its a good way to create jobs during contractions, and give the current infrastructure a lift.

dhukka · 8 August 2008

CanOz said:
So why not infrastructure development? Even if its partially/mostly privatly funded? Its a good way to create jobs during contractions, and give the current infrastructure a lift.

Absolutely, why not infrastructure development indeed. I was just postulating 'the likely course of action' by government.

Timmy · 8 August 2008

Real1ty said:
THE number of people in full-time employment grew by 53,700 in July putting employment figures at odds with other data suggesting the economy is slowing sharply.

Something to note is that employment figures are generally accepted to be a lagging indicator, so the fact these figures are 'at odds' with other data is not unusual.

dhukka · 8 August 2008

Interesting comments from ANZ:

ANZ may not pass on interest rate cuts
The ANZ Banking Group Ltd has admitted there is no certainty it will pass on in full any interest rate cut made by the Reserve Bank of Australia.

As the first of the major banks to front a Parliamentary inquiry into competition in banking, the ANZ was grilled over its stance on interest rates.

"We would like to cut those interest rates but we will have to assess what is happening to our funding costs at that time," said ANZ's managing director for mortgages, Michael Rowland.

Labor MP David Bradbury, whose NSW seat of Lindsay covers far western Sydney, led most of the questions to the ANZ on interest rates.

"There are many people in electorates like mine who are really doing it tough at the moment," Mr Bradbury told the bank.

"If the Reserve Bank takes a view, and takes a decision to cut rates, they will be the very people the Reserve Bank has in mind.

"If they do not receive the full benefit of what the Reserve Bank has intended, then in a way that's subverting what the Reserve Bank is trying to do through its monetary policy."

When Mr Bradbury urged the ANZ's Mr Rowland to give a clearer answer on the bank's intentions, Mr Rowland responded, "The strongest indication I can give you is that we want to pass on an interest rate cut, if funding costs allow.

"At the end of the day, we're a commercial organisation."

The House of Representatives Economics Committee is looking at whether competition in the financial sector has been reduced following the global credit crunch.

The ANZ told the hearing that the big banks' share of the home lending market had increased in recent months as non-bank lenders were forced from the market by higher costs.

But Mr Rowland said he expected the non-bank lenders to return when conditions improved.

The ANZ home lending boss also noted that his bank's profitability on each loan it made had been reduced by the high cost of funding.

The committee also heard submissions on consumer finance from the Consumer Action Law Centre.

The consumer lobby group said it was concerned about irresponsible lending by both banks and non-banks including pre-approved credit and so-called interest-free consumer finance.

dhukka · 11 August 2008

If you are bored (and I mean really bored) the RBA statment on monetary policy released today may be worth a read. However if that doesn't sound like fun, below is the important part of the statement which, at the end of the day doesn't say much more than they did last week.

In its recent policy deliberations, the Board has focused on both the risk that inflation may remain uncomfortably high, and on the accumulating evidence of a slowing in domestic demand and activity. Given the earlier background of strong growth in domestic spending and increasing pressure on productive capacity, the Board has for some time been seeking to restrain demand, and this has required a period of quite restrictive monetary policy. The evidence to date is that a significant moderation in demand is now occurring, and it is looking more likely that demand will remain subdued, and economic growth will be fairly slow, in the period ahead.

While inflation is likely to remain high in the short term, the Board judged at its August meeting that demand was slowing to an extent that could be expected to bring about a significant reduction in inflation over time. On this basis the Board decided that the existing monetary policy setting was appropriate for the time being. On the assumption that the subdued demand conditions are likely to continue, scope to move to a less restrictive monetary policy stance in the period ahead is increasing. The Board will continue to monitor developments and make adjustments as required in order to promote sustainable growth consistent with the medium-term inflation target of 2–3 per cent.

dhukka · 12 August 2008

Today saw the release of NAB’s Monthly Business Survey & Economic Outlook for July 2008. Key points include:

July Survey – Key Results
• Business conditions fell by 5 points to an index of -5 in July – 25 points lower than its recent peak in October 2007, a rate of slowing now faster than that leading into the post Olympic 2000 slowdown (and not seen since the early 1990s).
• Profits fell a further 10 points to -9 index points, while employment was negative for the second month in a row – a fall of 3 to -5 points. Trading also fell 3 to -2 index points. All these measures are at their lowest readings since late 2001.
• The fall in conditions was very broadly based – with all sectors falling, except personal and recreational services which was up marginally but remains at very low levels. Particularly large falls recently have been in mining, manufacturing and wholesaling. Confidence was marginally better in transport and personal & recreational services but weaker in mining, finance & business services, construction and wholesaling.
• Reflecting these sustained weaker results, capacity utilisation fell 0.9% to 81.6% – the lowest reading for over 3 years and noticeably lower than the recent peak of 85.1% in October 2007. Forward orders fell 3 to -6 points (again the lowest since late 2001).
• Overall, the Survey suggests domestic demand growth continues to slow sharply – to around 1% at an annualised rate.
• Annual wages growth was 5.4% in July – up 0.1 but largely unchanged during 2008 to date. In contrast, purchase costs continued to accelerate to be up 5.9% over the year (the fastest on record). Economy-wide & retail prices have also picked up – albeit to a lesser extent than costs – to be up 3.4% and 3.2%, respectively (at still high levels).

The commentary is even more interesting:

The key message from this month’s Nab Business survey is that the sharp slowdown in domestic demand continued through July and more importantly, that the rate of slowing has, in recent months, accelerated. The now large falls in sales and especially profits have begun to reflect in reduced labour hiring and a significant easing in capacity utilisation. As well as the speed of the deceleration, the view of business that the process is far from finished is somewhat concerning – with forward orders still slipping and confidence remaining at low levels. A profit squeeze on business is further highlighted by the continuing rise in purchase costs which, in current circumstances, is not able to be fully passed on – albeit inflation has edged higher. Clearly this cyclical slowdown is significant and far from finished. Global uncertainties are also not helping. For the rest of 2008 the die has already been cast, but if a hard landing is to be avoided in 2009, it is clear that domestic policy – especially monetary/financial - settings need to be eased significantly.

dhukka · 19 August 2008

The minutes of the RBA's August 5th meeting were released today. click here for the full statement. Below are the important points IMO.

I thought this comment on consumer spending was noteworthy, previously they had just said "slowing"

They observed that consumption spending had weakened considerably in 2008, with retail sales being essentially flat in value terms over the first half of the year. In volume terms, retail spending had fallen in this period, with both large and small retailers exhibiting weaker trends in sales.

Then the money quotes:

Given there had been a significant change in borrowing behaviour, confidence was weaker, asset prices had declined and slower overall growth was in prospect, tighter financial conditions were not warranted. Indeed, less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase. On these considerations, a case could be made for an early reduction in the cash rate.

Weighing up all these considerations, members judged that the current stance of policy was appropriate for the time being. Nonetheless, given the slower trend in demand, scope to move towards a less restrictive setting of monetary policy was judged to be increasing.

Clearly the bias has changed but we knew that already. What isn't clear is if they will cut in September. The RBA seems a little surprised by how quickly the economy has cooled and therefore they may cut in Sept. If they do it will be a subtle admission that they tightened too much.

Australian Economic Analysis

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