Some relative good news on the economy. Suddenly, Australia doesn’t look too badly placed economically after this week’s quartet of central bank meetings.
All four — the RBA, the US Fed, the Bank of England and the European Central Bank — left rates untouched for varying reasons. But of the four, only the RBA sent a very strong signal that it will be cutting rates, with 2 September the most likely date for a cut of either 0.25% and 0.50%.
The Fed was scared to cut again after cutting to heavily since August 2007, not with inflation of over 5% at the headline level. Not even fears of a further downturn in US economic activity this half with retail sales leading the way could force the Fed to trim.
Ironically, figures overnight showed the first signs of bargain hunting in the depressed housing sectors with a surprise rise in pending home sales. But sagging retail sales and a sharp rise in jobless claims for another week, reveal an economy that is starting to sink at an even faster rate. The one-off $US100 billion tax rebate has merely put off the inevitable by two to three months. When the mighty Wal-Mart cuts its sales outlook you know the retailing sector is heading for a pile up; especially with chains like Target and JC Penny reporting sharp falls in same store sales last month.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
American consumers spent their rebate and then boosted borrowings in June by $US14 billion, according to figures from the Fed overnight. That was as banks cut or stopped many consumers from accessing their home credit lines. Consumers borrowed $US8.1 billion in May, but boosted that in June, despite more of the rebate being available that month.
And US banks continued to borrow heavily from the Fed on a day to day basis, accessing an average $US17.45 billion in the week to Wednesday of this week, while also being kept afloat by $US150 billion in 28 day auctioned loans from the central bank.
The Bank of England was also frozen by fears of high inflation. Despite more evidence of a nearly straight line plunge in UK house prices in July (down 11% in the year to July). The UK economy is contracting as inflation remains high: the statisticians just haven’t got round to working out the extent of the fall yet. The IMF is forecasting a slowdown in growth next year, the Government isn’t.
There was however no talk of a rate cut as the central bank looks to bolster its anti-inflation credentials after several missteps. The sagging economy means a rate rise would verge on suicide for the Bank.
The European Central Bank though lifted rates last month to 4.25% in the face of rising inflation and mixed news on the economy. Four weeks later that’s looking like a misstep as well. There’s mounting evidence the eurozone is sliding rapidly towards recession, with some commentators saying it could beat the US into a proper slowdown. German economic growth has evaporated as exports fall; Spain, Ireland and Italy are battling to remain out of recessions of their own, France is sluggish and now Germany is pulling the whole lot down.
The Financial Times reckons the economic data of the past two weeks makes it hard to avoid the conclusion that the eurozone is on the slide. It remarked that ECB Governor, Jean-Claude Trichet made no great attempt to deny it in his press conference on Thursday.
Newsagencies reported that Mr Trichet said at a post decision news conference: the data “point to a weakening of real GDP growth in mid-2008” and said directly that the bank no longer has a bias towards raising rates. So no more rate rises, but no rate cuts. The ECB will watch the European economy continue to slide.
Only Australia’s Reserve Bank is well placed to cut. The RBA has the room to cut rates, even with inflation at a headline 4.5% (and by the RBA’s own measures) is still well above its 2%-3% range “over time”. It has this room because it started lifting rates a year ago this week and added 1% in all. The credit crunch added more than 0.50% on top of that by forcing up the cost of funding to the banks. That is now starting to unwind. The sharp rise in oil prices added to that by cutting back on consumers’ disposable income, very quickly.
That’s why building approvals and retailing have slowed so quickly. Oil is now down $US27 from its high, despite the small pick up to around $US120 this morning. The only factor to slow the rate cutting will be the Australian dollar which hit a new four month low of 90.65 US cents this morning as the US dollar rose against a weakening euro.
It was the Aussie’s ninth losing day in a row and according to Bloomberg, that’s its longest down period for 12 years. That’s now down around 8 US cents from its peak, or more than 8%. That will already trim the pass through of the lower oil price into petrol prices over the next few weeks. But it could help Australian exporters (especially resource companies), struggling with lower world prices at the moment.