The slump in oil and other commodity prices is sending a message that global economy will worsen, not improve, in 2009, a message that the Reserve Bank of Australia has been very alert to.

It’s why the bank has been pushing a message of an easing in monetary policy. The Bank is angling to make a pre-emptive cut in rates (just as it launched pre-emptive rate rises, starting a year ago to tackle inflation) to allow the economy room to adjust to any further downturn in the global economy.

The Australian dollar hit 88.10 US cents this morning, another seven month low against the US dollar; world oil prices finished slightly down at $US114 a barrel despite the fighting in Georgia, and gold fell by more than $US33 an ounce, despite the eruption of that conflict.

The message from the markets isn’t one of concern about the impending RBA rate cut. It’s the rush by big global investors to pull back from the world and re-invest in the US because they reckon the potential for losses there will be less than being exposed to other economies, such as Europe, the UK and Australia over the next year or so.

The gloom about the immediate outlook for the global economy has gone up a notch since mid-July, hence the rise in the value of the US dollar and the plunge in commodities. In Australia’s case the concern is what a extended global slowdown does to our economy and China and India. Hence the RBA’s comments yesterday at the end of its economic outlook in the latest Monetary Policy Statement:

Any further deterioration in the outlook for global growth would represent a significant downside risk to the domestic activity profile, particularly if it led to a marked slowing in growth in China and India.

This could lead to a significant deterioration in the outlook for the Australian economy and commodity markets, which could lead to further moderation in inflation over time as growth of domestic incomes and spending eased and oil prices fell.

So the RBA will be watching the flow of statistics from China this week and wondering about the positive impact on China and India of the slump in commodity prices.

China’s trade surplus unexpectedly rose last month while producer prices jumped at their fastest rate in 12 years. The trade figures were good news: a 4% rise on July last year and a $US4 billion jump on June’s low figures. But the bad news was the producer price increase of 10% ( annual rate) in the year to July, the worst outcome since 1996.

With a post-Games campaign to rebuild earthquake-hit Sichuan sparking lots of spending, there’s every chance a global slowdown will not hurt China as badly as some think. The Reserve Bank is looking for a slowdown in our economy over the rest of this year and into 2009, with a rise in unemployment to 5% or a bit more.

The rally in the US dollar and the fall in global commodity prices is a warning to us that more dangers lie ahead. The Reserve Bank has already heeded that warning with its switch in policy to a rate cutting stance.

Peter Fray

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