Barring any unforeseen disaster in financial markets, or a dramatic slump in exports (or in the Chinese economy — still quite possible), the Reserve Bank seems to have concluded its dramatic sequence of rate cuts.

Despite confirming that Australia is recession, and forecasting negative growth for the 2009 financial year and calendar 2009, the RBA’s latest board minutes show no signs of gloom.

In fact there’s an optimistic tone in many of the comments (unattributed) that are seemingly at odds with forecasts for a 1.5% contraction in the year to June and a 1% contraction in the year to December.

And, while the bank acknowledges that unemployment has further to rise, there’s no sense of pessimism about that, or about the economy generally.

These minutes continue the apparent “difference” with the Federal Government over the economic outlook: Treasurer Wayne Swan and Prime Minister Kevin Rudd have been far more alarmist in their dramatic warnings. But the RBA is more measured in these minutes; for instance there’s no discussion of budget deficits and the like.

One thing that stands out is the apparent “impact” the release of building approvals figures for March had on the May 5 board meeting of the RBA board. The minutes make direct reference, twice, to the release of the figures.

“Turning to the housing sector, building approvals had recently picked up, which was confirmed by figures for March released during the meeting, with a significant increase in first-home buyers purchasing newly constructed homes.”

And “A number of indicators suggested that the outlook for business investment was quite weak: imports of capital goods had declined sharply; business surveys revealed that expectations for business investment were well below average; and private non-residential building approvals had fallen sharply in the early part of 2009, though data released during the meeting suggested a significant rise in the month of March.”

Elsewhere there was ample evidence of the board’s upbeat tone:

  • “Members noted that despite significant falls in investment expected in the current and following year, the level of investment as a share of GDP was not expected to decline to the levels seen in some previous downturns.”
  • “Business credit had contracted in three of the past four months, though total business debt funding was not as weak, as some companies had accessed capital markets directly.”
  • “Turning to the external sector, the terms of trade were declining because of lower commodity prices, but even so were at a historically high level. Export volumes had held up much better than expected; they were estimated to have been stable in the March quarter. Members noted the key role of China in Australia’s export performance.”
  • “The wide range of economic data considered by the Board generally pointed to some improvement in confidence and economic activity in a number of countries. The strongest signs were in Asia, with production in China rebounding particularly quickly. While it was too early to be confident about the durability of this trend, the evidence was accumulating that the maximum rate of global economic contraction may have passed.
  • “Members also noted the much better tone in financial markets. Share prices had risen strongly in all countries in recent weeks and credit spreads were declining noticeably. Businesses had been able to raise more debt in capital markets and banks, including those in Australia, had been able to issue some non-guaranteed debt in their home markets. Sentiment nevertheless remained fragile and could easily be disturbed by adverse news.”
  • “In the case of the Australian economy, members observed that there were signs that the economic stimulus that had been applied was supporting demand.”
  • “Overall, the Australian economy was likely to record better outcomes than most other advanced economies in 2009 and 2010, reflecting the healthy state of the domestic banking system and effectiveness of the macroeconomic policy stimulus to date.”

All this upbeat commentary had a logical result — no rate cut for May: “Taking into account the economic and market developments that had come to light over the past month, the major easing in monetary policy that had already taken place and the substantial fiscal stimulus that was being implemented, members judged that the best course for this meeting was to leave the cash rate unchanged.”

Peter Fray

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