The Australian dollar dropped through parity with the US currency at 12.20pm today for the first time in nearly five months, just before Reserve Bank deputy governor Philip Lowe got to his feet and told a Melbourne business audience that the outlook for many companies in the non-resource and mining parts of the economy faced further, not fewer pressures.

The Aussie dollar hovered above parity with the US currency this morning after commodity markets lost all their gains of 2012 last week, and the prices of oil, copper, cotton and other commodities fell to new lows for the year so far or longer. It slipped to about 99.96 US cents just after midday. It then bounced back over $US1.

Lowe warned that it seems “likely that growth in some sectors (of the economy) will remain below the average experienced over the past couple of decades”. He didn’t name these sectors, but retailing would have to be one because of the significant structural change it is undergoing, thanks to consumers not spending as much and the internet changing the way people buy. At the same time he suggested that companies faced profit margins being crimped and wages and salaries restricted by the sluggish level of activity in some sectors.

He said that for the economy generally “overall GDP growth is expected to return to around trend over the forecast horizon, with the recent reductions in the cash rate providing some boost to demand in the non-mining-related parts of the economy … How things develop will depend importantly on the ability of firms to improve their productivity and on the ability of the labour market to match workers with the new jobs being created.”

Lowe said the RBA had an “expectation that the current pressures on margins being experienced by many firms in the non-mining-related parts of the economy will work their way up the production chain, leading to some moderation in growth in input costs, including in the cost of labour.” In other words companies will have to swallow the lower profit margins, but these will in turn place downward pressure on costs, especially wages and salaries.

Lowe’s speech was the first since the RBA cut its cash rate by 0.50% a fortnight ago tomorrow, a move interpreted that was as either reflecting the sluggish nature of wide parts of the domestic economy, and or forcing banks to cut rates by more than they would have if the reduction had been just 0.25%. The banks have responded with rate cuts of between 0.30% and 0.40%, but data on retail sales, car sales and perhaps jobs suggest the domestic economy isn’t as weak as some have suggested.

Figures out today added to that suggestion. Home loan approvals showed a surprise rise in March, not the fall the market had been forecasting. Home loans approvals were up 0.3% in March, following a 2.5% drop in in February. The market had been looking for a 2% fall for the month. That echoes the small rise in housing approvals last week (thanks to rises in private and non-private dwelling approvals), after the market forecasts had been for a fall. And the market had predicted a 0.2% rise in retail sales in March, not the 0.9% jump reported by the ABS.

And the jobs data last Thursday showed a rise of about 15,000 in part-time work, but a fall in full-time jobs and the participation rate as thousands of workers stopped looking for work. But there is now some confusion about the way the ABS complied and computed the jobs data for the past year or so. That confusion could explain why the jobs market is a bit more resilient than it should be.

But the threats to the economy do not lie domestically: they are external. Europe has been worrying the central bank now for nine months, and there could be developments in the next couple of days as  new French president Francois Hollande is sworn in and then goes to Berlin to meet Chancellor Angela Merkel, whose CDU party just suffered a nasty rebuff in Germany’s biggest state, North Rhine Westphalia. It was the second weak showing by Merkel’s party in two state elections in as many weeks.

Now they have signs the Chinese economy might not be as solid as it seemed at the start of the month. China cut its reserve requirement ratio imposed on banks for the second time in three months at the weekend.

That was after the weakest industrial production figures in three years in the 12 months to April (up 9.3%, sharply down from 11.9% in the year to March); the weakest growth seen in investment for a decade and a surprise fall in retail sales and bank lending. Imports were weak, exports rose by nearly 5%, but around half what was forecast (although the trade surplus rose) and inflation eased a touch last month. Car sales were also weak again in April. Steel production fell slightly from March, but was up on April, 2011. Copper production and that of oil, zinc and tin fell, while electricity output was all but steady on a year ago. The pointers suggest the strengthening economy picture seen in surveys of manufacturing activity at the start of this month, is not the same as the story painted by the generally weaker tone to the month’s economic data.

The cut in the Reserve Ratio will release about $US64 billion to the banks for lending and to boost liquidity, which remains tight as the government tries to slow inflation (which it is doing) and the real-estate sector (transactions fell 15% last month) without crashing the economy in a hard landing. The soft-landing thesis had been accepted up until Friday’s release of the production and other data. Now analysts are wondering if China might be in for a much rougher ride in coming months with growth slowing under the 1.8% quarter on quarter seen in the three months to March.

While one month’s data doesn’t make a crunch, there are several pointers that again appeared in the Chinese economic data for April that have raised fears that the much anticipated soft landing for the economy could be rougher and more damaging than expected. A harder landing in China has adverse implications for Australian resource exports, especially iron ore and coal, plus the federal budget’s forecast of a $1.5 billion surplus for 2012-13 as well as for employment and the investment boom.

Peter Fray

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