The impact of the slumping economy was again underlined in today’s release of trade figures for February showing a sharp rise in the surplus to more than $2 billion — much, much more than most market forecasts.

In fact the market forecast was for a contraction in the surplus from January’s reported $970 million to $700 million. Instead it varied between $1.1 billion to $2.109 billion in February. The January figure was revised down to a surplus of $926 million by the Australian Bureau of Statistics.

Forecasts from the market were also well short for retail sales: a fall of 0.5% was tipped, instead it was a fall of 2%. Only one economist picked that one in the various surveys. They were also short on the rise in building approvals which were skewed to a rise in home units and flats.

Exports held up as a combination of the devaluation in the Aussie dollar and still record prices for iron ore and coal exports offsets falls in some other sectors. Exports totalled $24.933 billion, up $1.0498 billion. The main reason for the increase was the re-export of non-monetary gold, plus higher shipments of rural products.

We can expect a similar outcome for March, but then export income will trend lower as the lower prices for iron ore and coking coal shipments, especially into China, Japan and other markets in the region, start kicking in.

Imports eased $134 million to $22.824 billion (non monetary gold imports rose more than $780 million in the month to distort the picture). But consumption goods tumbled $691 million as imports of cars and transport equipment fell 22%, or $227 million and other consumption goods dropped 8%. Imports of capital goods rose 7%, or $318 million), proving that business investment is still happening, even if business lending fell in the month of February.

Coming after the 2% fall in retail sales in February and the rise in building approvals (which were pushed up by a jump in non private dwelling approvals in NSW in the month from a 40 year low), most commentators would be tipping a rate rise.

But that doesn’t seem to be the case. Goldman Sachs JBWere didn’t release any analysis this morning on the retail sales and building approvals, but a couple of other business economists did. All have pointed to columns by Terry McCrann in the News Ltd tabloids and Alan Mitchell in the AFR who both said the RBA will sit pat next Tuesday and not cut rates.

Both are considered to be “well-connected” to the Reserve Bank.

Economists at UBS said:

Today’s data are mixed with a drop in retail sales and skilled vacancies, but a lift in building approvals. On retail sales however, we note that there was always going to be a month when consumers dropped back to their underlying trend — we just did not think it would necessarily be February.

Today’s data — along with recent downgrades to world growth forecasts by the OECD and World Bank, and Deputy Governor Battellino’s implicit Australia GDP growth downgrade yesterday — add to the case for further easing by the RBA. That said, usually ‘well-sourced’ journalists have now declared that the RBA will hold rates in April, such that we now also expect the Bank to pause next week, before cutting rates further to 2% over the coming months.

But Merrill Lynch took a different view — it reckons a rate cut is still a distinct prospect.

The slump in retail sales in February suggests the boost to consumer spending from the Government’s fiscal payments and lower interest rates is already fading. This is despite perhaps one of the most aggressive easings of monetary policy by the RBA on record, and direct fiscal cash payments to low-to-middle income earners totalling $8.7bn (0.75% of GDP) in December.

While lower rates and a further $11bn (0.9% of GDP) in fiscal payments in late 1Q and 2Q09 will mitigate the downturn in spending, we do not believe the income relief will be sufficient to avoid a consumer recession in 2009, particularly in discretionary spending areas. In our view, decelerating disposable income growth from falling employment and de-leveraging (rising savings), along with material wealth destruction and fragile confidence will overwhelm the benefit to incomes from lower interest rates and transfer payments.

The very weak retail sales data in February is consistent with our view that the RBA will lower the cash rate by 25bp to 3.0% on April 7th.

As Macquarie Bank interest rate strategist Rory Robertson says:

Whether or not the RBA cuts next Tuesday remains a close call, in my opinion. With the news of our deepening recession still being factored into the RBA’s forecasts and policy assessments, the decision next Tuesday will be a “judgement call” made on the day by Governor Stevens and the Board. My strong sense is that it’s way too early to rule out a 50BP.

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Peter Fray
Peter Fray
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