Memo Julia: fixing the mining tax is the easy deal, just give away as much as the mining industry wants, which you have done. Your next big test is in what’s happening in the markets. It’s not good. Go to an early poll because the economic landscape here and offshore is looking ugly.

Of course, if you go in August, you have to make the decision before the RBA board meets on August 3 to consider the June quarter inflation numbers (expected to be not so good) and a possible rate rise. Julia, if the RBA thinks we need it, it will follow the 2007 election campaign precedent and push up rates in a campaign and there’s nothing you or Wayne the rat can do about that.

But by going early and risking a rate rise (I don’t think it will happen) you will avoid the bigger danger, campaigning as the economy approaches stalling speed. Our economy is slowing, retail sales in May rose 0.2% but are not keeping pace with population growth, building approvals are weak, but banks are starting to lend more to business, and are keeping up home lending.

And if you speak to Wayne Swan make sure he’s sure the RBA is as focused on what’s happening offshore as it is in Australia. It is, but in 2007 and early 2008 some senior members of the bank weren’t, just as the Bank of England, the ECB and especially the US Fed missed the importance of the US subprime mortgage crisis. Some at the bank didn’t. But make sure when someone says China is strong, that you understand that if there’s another global slide, China will not save the day as it has this past year.

The reason for our continued solid performance, China’s economy, is cooling, but still growing. The growth surge has gone and that means the big commodity price rises of the last year are a thing of the past.

This week we have seen a frisson of fear in markets about the health of the global economy, despite Europe’s banks surviving the end of June/July 1 refinancing concerns. There’s a sudden realisation that the US economy is approaching its stall envelope, but not a double dip recession, yet.

The big surge in global manufacturing has slowed; there’s still growth, but for two or three months now the pace of the expansion has been fading, especially in China where the cooling of the economy western analysts were calling for, is happening, but no one knows where it will finish. We can be certain that the record prices the likes of BHP Billion and Rio Tinto and other objectors to the resources tax are receiving from China and other Asian buyers, will vanish in coming months as demand slows.

Already commodity prices across the board have fallen sharply; copper fell 17% in the June quarter and another 2.5% yesterday. Oil fell more than 3% on top of its 9.7% fall in the quarter. That’s telling us that the market thinks global growth (manufacturing was the only sector with the strength to pull the world out of the recession) is slowing by the month and with it demand for commodities of the sort that Australia produces.

China’s manufacturing in particular showed a worrying decline, with one survey actually showing a couple of negative pointers in forward orders. The increasingly sluggish state of global manufacturing — the sector that hauled the world economy out of recession in 2009-10, especially in Japan, China, Germany, the US, UK and South Korea means there’s nothing there to pick up the slack.

Excess capacity in every economy bar China’s hasn’t been absorbed, unemployment is high (as the Americans will be reminded tonight with June’s jobless report), consumers are hunkering down (there was a fall last month in sales at some major US retail chains, Australian sales are weak) and inflation is falling because the excess capacity and jobless overhang are depressing wages and the ability of companies to lift prices and keep them there.

Even though inflation is a problem here, the bond market is less concerned, with 10-year bond yields here now down 0.76% since mid-April. Julia, that market is tracking bond yields around the globe lower as deflation looms in the US, the eurozone and carries on in Japan. The greedy state governments in Australia are pushing up fees and charges and that will ensure inflation doesn’t fall too far in Australia, but later this year and in early 2011, we will be glad to have a little price action: there will be nothing in the US or Japan, or Europe.

Ten-year US bond yields fell to 2.88% at one stage overnight, a 14-month low, before retracing to end at 2.93% as the poor data emphasised fears of a slowdown and the looming deflationary pressures. The 30-year bond traded about 3.84%, which is where all the pundits forecast the 10-year bond to be when issuing their start of year forecasts in January.

Tonight, the US will remind you of the strength of the Australian economy with the June jobs report: thanks to losses of part-time Census workers, the figure will be high (the key will be the number of private-sector jobs). A surprise rise in weekly jobless benefit rates overnight confirmed that American unemployment is not improving. But that won’t be a reason to gloat, more a confirmation that an early election will be better than one in November. Our jobs figures for June are out next Thursday, don’t worry about those or July’s.

Concern is now focusing on the health of the American economy. Car sales last month were lower than forecast. General Motors and Ford reported lower sales from May (but higher than June 2009, which was still weak). Car sales were one of the few parts of the US economy performing moderately well, but the annual rate has fallen by more than expected as consumer confidence fell. The annual rate of sales eased for a third month as sales to retail customers again weakened.

In the US, the Institute for Supply Management’s survey fell more than forecast to 56.2 last month from 59.7 in May. It was the slowest growth rate for this year so far for US manufacturing with fewer orders received and export demand down.

Existing homes sales fell 30% in May, (“off a cliff”, said one headline) as the tax credit expired. Claims for jobless benefits unexpectedly rose last week. Initial jobless claims rose to 472,000 last week, higher than the average 455,000 forecast by economists. The number of people receiving unemployment insurance rose, while those getting emergency benefits dropped after Congress failed to act on extending the legislation.

A separate report from the Commerce Department showed construction spending fell 0.2% in May, the first fall in three months, thanks to home builders cutting back and general construction work down as well. It’s 0.8% lower than a year ago, which indicates the depth of the depression in this sector and housing (New home sales fell 33% in May).

That, Julia, is the current outlook for the global economy; its actually weakened in the eight days you have been PM. There’s no sign of a double dip (where an economy falls back into recession), at the moment; the projections look like a bout of deflation and very low growth. But watch the Chinese economy’s progress, and that of the US housing sector. The former is driving our national income and feel-good economy, the latter is sliding into a black hole for the second time in three years and could drag America with it.

Peter Fray

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