Guess what? The world (contrary to yesterday’s plunge on the Australian stockmarket and The Australian Financial Review this morning) didn’t end overnight.
So instead of Armageddon, Europocalypse or something similar, of which yesterday’s 79-point fall here seemed to be a harbinger, we had 50-plus point market surge at the opening this morning. The Henny Pennys in the market have survived the farmer’s axe to live another day and worry, which they will do with this afternoon’s rate decision from the Reserve Bank.
It’s in the nature of the media, including the business media, to overstate problems. There’s no fun in a “things generally OK” headline. But at the moment we know all our key risks: the weak non-resources economy, slowing China, Greece, Spain, the weak US. Qantas shares were hit by a profit downgrade from the airline, which warned of a bigger loss for its struggling international business.
While we go through our usual obsession with whether and by how much the RBA will cut this afternoon, we seem to be losing sight of how the cash rate (like the budget surplus) is a tool aimed at better economic outcomes, not an outcome itself. A 0.25% cut might be enough to please investors; no cut will produce a flood of tiny feet being stamped in frustration, and a big cut of 0.50% will satisfy the nervous nellies and panicky commentators. But how much will even 0.5% address the drivers of the current bout of fear, imploding Europe and the Greek poll on June 17, crunching China and drifting America (and its approach election)?
If 1% of rate cuts from last November have had no impact on retailing, house prices and consumer confidence, what impact will another rate cut have except to justify the cackling of a fleet of pet shop galahs (thanks Paul Keating)?
Tomorrow we get the GDP figures for the March quarter, which won’t help settle tensions, and on Thursday it’s back to the “rate cut looms/out” cycle with the May employment data. The enthusiasts in the forex market think rates might not change because the Aussie is up more than half a US cent at 97.49 at 11am. But that might have more to do with the absence of any impending, hinted or suggested disaster in Europe. We are also a day or so away from the start of the flow of May data for the Chinese economy, so perhaps everyone is scheduling a panic for Thursday perhaps or Friday.
This morning’s current account data for the March quarter from the Australian Bureau of Statistics confirmed what already knew: that the weakening trade account in the first three months of the year saw a big jump in the overall current account deficit. The ABS reported that the deficit, seasonally adjusted, rose $5.253 billion or 55% to $14.892 billion in the three months to March.
“There was a turnaround of $5,316 million on the balance of goods and services, resulting in a deficit of $3,062 million in the March quarter 2012. The primary income deficit fell $72 million (1%) to $11,668 million,” the ABS reported. “In seasonally adjusted chain volume terms, the deficit on goods and services rose $1,816 million (14%) from $12,819 million in the December quarter 2011 to $14,635 million in the March quarter 2012.”
Some of us are old enough to remember when the current account data would dominate political and economic discussion for days. Now, its main interest is in how it affects GDP. And today’s data “is expected to detract 0.5 percentage points from growth in the March quarter 2012 volume measure of GDP,” the ABS reported.
That means the market range for GDP growth tomorrow between 0.4% to 0.7% quarter on quarter remains. But one imponderable is how a small rise in government spending in the quarter impacts the accounts (remember that, in dragging a lot of spending into this financial year from next as part of its surplus efforts, the government is in effect providing additional stimulus, or more accurately reducing its stimulus withdrawal, to the economy right now).
And finally, weren’t we all comforted by the news that Standard & Poor’s sees a 30% chance that Greece will leave the eurozone in the months after the June 17 poll. “We believe there is at least a one in three chance of Greece exiting the eurozone in the coming months” by rejecting austerity measures it agreed in exchange for its massive EU-IMF bailout, S&P said.
Standard & Poor’s is the same mob that used last Saturday’s edition of the AFR to warn that Australia risks losing its AAA rating if we allow any move of the federal budget back into a deficit to exist for an “extended” period of time, although it later backed away from its remark.
After US house prices, CDOs and the sovereign ratings of Greece, Spain, Italy, Ireland, etc, there’s nothing like a ratings agency that has rediscovered religion for financial pomposity. Make sure you’ve got that panic entered in your diary. S&P definitely does.