Could current solid car sales stop a Reserve Bank rate cut on May 1? It’s hard to see it happening, but add in the stronger-than-expected performance of the jobs market last month. Could both derail what most think is a certain rate cut?

At the moment, its hard to see, but a rate cut is not an absolute dead cert at the moment. It’s still line ball as the RBA considers the real level of demand, output and inflation in the economy.

The March and first quarter car sales have given lie to claims that consumers and business aren’t spending and that demand is weak across the economy. It is in pockets, but the car sales confirm that consumers and business are spending, it’s just that they are not spending on the sorts of goods that many retailers are selling.

The solid level of demand of car sales isn’t being matches by a boom in car production, although it’s a bit better for domestic sales. Exports have been hit by the dollar and uncertain demand in the Middle East (The impact of 2011’s Arab Spring in the Gulf). But it is another part of an economic picture that is clearly puzzling the RBA.

March’s very strong jobs report last week with 44,000 new jobs created, a rise in hours worked and the participation rate and a small fall in unemployment, plus the solid rise in job ads (as shown by the monthly ANZ survey in the first quarter of this year), are more parts of the puzzle that were reported after the April 3 meeting of the RBA board.

The reality is that, according to figures from the Australian Bureau of Statistics and the car industry, sales are growing and are currently running at near two-year highs. It’s a sign that demand for this key product remains strong, even if demand levels in other retailing sectors are weak.

In fact the RBA minutes captured this point nicely:

“The national accounts showed that household consumption spending on both goods and services increased by around 3½ per cent over the year to December. This was a little higher than the rise in disposable income over the same period, and it was also stronger than suggested by other partial indicators, including the bank’s retail liaison.”

The RBA and governor Glenn Stevens have referred to the weaker-than-forecast level of demand and output in recent months (the economy is growing below “trend” is the key phrase). That means they can’t work out if the weaker demand is a one-off, temporary thing, or a sign of a deeper sluggishness in the domestic economy (the external economy, exports, is clearly strong, as is private investment which is booming, especially in resources).

And the bank can’t determine if this weaker level of demand is responsible for a slowdown in output that will continue, or recover in the next few months as consumer caution and weak sentiment improves. And the RBA worries about the impact of a rate cut, if it is temporary. The bank misread inflation in 2005-07 and didn’t push up rates quickly enough, only to be forced in 2007-08 to push them up as the first resources boom exploded into the economy, pushing up inflation that was only curtailed by the GFC in 2008-09.

For that reason, the bank’s senior management remains uncertain about a rate cut at the moment, and has felt this way for all of this year, hence no rate cuts, despite weak retail sales, easing home lending and a spate of job cuts (which have not pushed up the level of unemployment or the jobless rate).

The apparently weaker than forecast level of demand and output in the economy showed up in the minutes for the April 3 board meeting, released yesterday.

They show that consideration of the next Tuesday’s March quarter CPI will be made in terms of the lower-than-expected level of demand and output in the economy; specifically whether “slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for a further easing of monetary policy.” In other words, the RBA remains to be convinced that the current sluggish level of demand will see inflation ease and remain at a moderate level in the next year or so, if a rate cut is announced on May 1.

For that reason, the car sales data for March are a bit more important than many people think. They are the most recent evidence of the level of demand for a key consumable item, cars (and petrol and associated services). The Australian Bureau of Statistics said that sales rose 4% in March, seasonally adjusted to a 22-month high. The 89,694 sales last month were the highest since May 2010. The trend figure rose 0.6% from February. And the Australian Bureau of Statistics said the 261,886 units sold in the three months to March was the highest since the first quarter of 2008 when 270,611 units were sold.

In short, car sales are strong, led by a boom in sports utility vehicles. The ABS said sales of sports utility vehicles were again strong, up 7.5% in March, from the previous month, for an 18.4% jump for the year so far. Sales of passenger vehicles rose 3.3% in the month, while sales of other vehicles increased by 1.4%.

Now at a time of rising petrol prices you’d think that car sales would be weak, especially the fuel-chewing SUVs. But many of these are the smaller urban SUVs type of vehicle that have appeared in the past couple of years and more are diesel powered. Diesel now makes up just under 30% of car sales each month.

News of the strong sales figures for March and the March quarter came as the minutes of the April 3 meeting showed a subtle difference to the post-meeting statement from Stevens which highlights the reservations within the bank about the state of the wider economy.

Peter Fray

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