Australian Economy Limping Along

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MELBOURNE AUSTRALIA 7 December 2006 – What a difference a month makes.  Last month even the excitement of the Melbourne Cup, supposedly the “Race That Stops The Nation”, couldn’t stop the chitter chatter in the market and the media about the possibility of an interest rate rise.  As if it was made to order, the Reserve Bank of Australia duly delivered a piping hot, family sized 25 basis point increase in the RBA’s Cash Target Rate.

This month it was a different race that stopped the nation.  Well, it stopped the Canberra press gallery and a few political junkies anyway.  Even so, the majority of ordinary folk seemed to have other things on their mind.  Waiting for the venerable Mr. Glenn Stevens to give us an early Christmas present wasn’t one of them.

For the majority of people it was the case of getting out and spending what is left, and perhaps a little bit more in order to enjoy the intoxication of the festive season.  Everyone knows that as sure as night follows day that a hangover follows a drinking binge.  And in this case a debt hangover will surely follow the spending binge.

How much more of a pounding hangover we would get if rates had risen.  Fortunately the RBA has chosen to dish out Alka-Seltzers rather than double vodkas.

Stephen Koukoulas, chief strategist at TD Securities said, “The cash rate is at a restrictive level, we’re probably still going to get elevated inflation for the next few quarters.  Along with that, we are going to get growth a little below what we are used to.”

It appears as though the RBA believes that its previous interest rate rises have helped to cool the economy.  Can those statistics be trusted though?  According to Bloomberg News “The bank’s moves have stalled a housing recovery and damped household borrowing, cooling a 15-year expansion in the Asia-Pacific region’s fifth-largest economy.”

Aside from the interest rate movements, the continuing drought has also had an impact on the economy.  Bob Cunneen, economist at AMP Capital Investors said “The economy is more subdued, and the particular weaknesses are the farm sector and business investment.  There’s little growth momentum, so inflation pressure should start to ease and the Reserve Bank has done enough on interest rates.”

As reported by Bloomberg News, “Gross domestic product… rose 2.2% in the three months ended September 30th from a year earlier.”  This was below the comparable GDP figures for the United States, United Kingdom and Japan.

Fortunately, the mining sector was able to keep the economy going.  Senior economist at Macquarie Bank, Brian Redican said, “Mining was the main driver of the economy.  Most other industries were basically flat.  Overall, the economy is limping along.  Past drivers of growth like business investment and the mining boom in Western Australia, look to be waning.”

Doesn’t look good does it?!  However, Stephen Roberts, research director at Grange Securities told Reuters, “We suspect the economy isn’t quite as weak as the data suggests, but it’ll be hard to justify further tightening with GDP almost at a standstill.  And, if the data stay like this people will start talking about rate cuts for the second half of next year.”

Perhaps even more ominously for the Australian economy is the view from Morgan Stanley chief economist Stephen Roach believes that the US economy is finally about to hit the skids.  He said, “It is going to fizzle out more than what most people think.  The world will not fall into recession, but this significant shortfall will have a negative impact.  It’s not a recession but it’s darn close.”

We will make one point of caution.  Mr. Roach hasn’t been entirely accurate with some of his predictions in recent years.  it was only six months ago that he turned from a Bear into a Bull just two days before the May ‘correction.’

Interesting times indeed.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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