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Economy coming off the boil as Stevens sets things straight for the markets

The economy is losing steam in the second quarter of the year, and the budget didn’t help. But RBA governor Glenn Stevens says interest rates will be steady for a long time to come, Glenn Dyer and Bernard Keane write.

The economy’s flat second quarter performance has continued, according to data released by the Australian Bureau of Statistics this morning, and Treasurer Joe Hockey in particular seems to have scored a direct hit on retail sales with his apocalyptic budget rhetoric. But the real economic action was down in Tasmania.

The good news appeared to be in housing construction: seasonally adjusted figures showed a 9.9% rise in total dwelling approvals, including a massive 27.2% rise in approvals for non-house dwellings. But that reflects the problems we discussed last month, when Easter and Anzac Day combined to cut approval numbers — as we predicted then, the May numbers have bounced back. The trend figures, however, are much flatter, with total dwelling approvals down 1.7%.

The news was poorer, however, in retail: retail turnover fell 0.5% seasonally adjusted (flat in trend terms) after a 0.1% fall in April and a flat March result. Retailers can thank Joe Hockey for that outcome: the government ramped up its gloomy budget rhetoric in late April and then produced a painfully unpopular budget in the second week of May, and the impact on consumer sentiment appears, for once, to have translated directly into poorer retail sales. As usual, cafes and food managed to rise, while the usual suspects clothing (-0.6%) and department stores (-0.2%) were down. But figures from the car industry (which isn’t included in retail data) showed little change in June from the same month a year ago as Australians took up the end of financial year offers from car companies their dealers.

The bigger news was from Reserve Bank governor Glenn Stevens, who gave a tour d’horizon to an economics conference in Hobart. The Bank sees the economy as now slowing from the 3% growth rate in the last half of 2013 and the higher rate in the first quarter. “The most recent set of GDP figures [for the March quarter], while certainly encouraging, probably overstate somewhat the true ongoing pace of growth in the economy. The Bank’s forecasts from early May, which we have not materially changed, embody ongoing growth but, in the near term, probably a little below trend.”

But Stevens was a little more sanguine than previously about the impact of the federal budget, saying it “seems unlikely materially to change the near-term outlook. Over the next couple of years the estimated impact of the budget is not very different from what we had previously been assuming, and the extent of fiscal contraction, as conventionally measured, is actually not particularly large when compared with past episodes of fiscal tightening. Beyond that period, the measures in the budget will result in a more significant consolidation than earlier assumed. It was over that more medium-term horizon that the Commonwealth’s finances, left unattended, looked like they were going to start going more seriously off course. So the timing of the intended consolidation seems broadly sensible.”

Stevens also repeated a previous warning from the Bank about the Sydney property market, saying “investors should take care” while expressing no great concern about the overall property market. And, speaking to markets in less subtle terms than usual, he flagged that interest rates would remain at their current level (and lower, if needed) well into 2015. Indeed, he devoted a substantial part of the speech to explaining the bank’s use of language. If the RBA feels the need for a rate rise coming on, he said, it will change its language to make clear that such a move is on the way. He also, while declining to repeat the word “uncomfortable” about the high level of the dollar, made his position clear

The exchange rate remains high by historical standards. There is little doubt that significant parts of the trade-exposed sectors still find it quite ‘uncomfortable’: it continues to exert acute pressure for cost containment, productivity improvement and business model change. When judged against current and likely future trends in the terms of trade, and Australia’s still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents … Nonetheless, we think that investors are under-estimating the likelihood of a significant fall in the Australian dollar at some point.

The combination of the somewhat cautious tone about growth and the dollar saw the currency lose half a cent in minutes to trade around 93.00 US cents around midday — more than a cent under its recent high of just over 95 US cents on Wednesday morning in offshore trading.

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