there must now be a small chance that the easing cycle due to kick off tomorrow will be postponed a month, so the RBA’s economists can get a clear fix on what’s going on.
As the shock of last week’s capital expenditure figures reverberates through economic spreadsheets and up into the recesses of the Reserve Bank in Martin Place, Governor Glenn Stevens must be wondering whether he has locked himself into a rate cut prematurely.
In fact there must now be a small chance that the easing cycle due to kick off tomorrow will be postponed a month, so the RBA’s economists can get a clear fix on what’s going on.
To oversimplify: Consumers are collapsing quite nicely into a despondent heap, but the strength of business spending is extraordinary and quite inconvenient.
The second quarter survey of capital expenditure intentions released on Thursday indicated that business investment in Australia would rise an incredible 34% in the current financial year. According to ANZ’s Warren Hogan, this suggests economic growth this year of an astonishing 5%.
Most of the nations of the western world seem to be entering recession and Australian consumer confidence is at recessionary levels, yet forecasts of economic growth, including within the RBA, will have to be raised over the next week, possibly to as high as 3% (from 2.25%).
In its Monetary Policy Statement on 14 August, which led to expectations of a September rate cut being raised to a 100% certainty, the RBA said: “It is looking more likely that demand will remain subdued, and economic growth will be fairly slow, in the period ahead.”
Economic growth of 5%, or even 3%, is not “fairly slow”, and does not need a rate cut. The national accounts due out on Wednesday will probably show an economy still growing at between 2.5% and 3%, thanks to strong business investment.
Even if we assume that only half of the investment intentions come to pass, that’s 17% growth in capital expenditure, which is still rather strong for an economy that is supposed to be on the brink of recession.
It is, of course, all about China.
At an Institute of Directors lunch in Hobart on Friday I was asked whether it would be a problem for Australia’s economy to be even more focused than it is now on shipping bulk commodities to China in 10 or 15 years. I replied that I couldn’t really see too many problems with Australia being the Saudi Arabia of iron ore and LNG, as long as the cash is not looted by high-living princes and investment bankers.
The export boom that is supporting the United States economy at present looks fragile, based on a weak currency that is temporarily overcoming a slowdown in demand.
But Australia’s investment and export boom is based on something real and lasting; the industrialisation of China and India.
Meanwhile, back at Martin Place, the boffins must be confounded and more than a little worried about tomorrow’s rate cut.
They will probably go ahead with it and the banks will pass it on, having had a forest of fingers wagging at them for the past few weeks. But this will probably be the first and last rate cut that will be fully passed on.
The banks used the 1990 recession official rate cuts to rebuild interest margins from -1% to +4% (the difference between the cash rate and the standard variable mortgage rate), which ushered in an era of great prosperity for the banks and their executives.
The margin had been stuck at 2% for more than a decade before last year and has now been expanded by 50 basis points. The banks will be keen to grab another 50 points at least before this year is out – they might have some consumer bad debts to pay for before this cycle is over.
This article first appeared on Business Spectator