Dec 4, 2012

The RBA’s Chinese dilemma: Asian comeback clouds the picture

The RBA is likely to cut today, but the return of China to strong growth makes it a more finely-balanced decision than many claim. Crikey's Glenn Dyer and Bernard Keane report.

"Rate cut looms", we’re told. The consensus, as even a passing glance at the morning's media will tell you, is a cut. The logic isn’t quite as clear cut as some maintain. Remember, the RBA makes decisions based on where it thinks the economy is heading, not where it’s been. Yesterday’s flat retail, investment and wages data seemed to suggest that the around-trend growth noted by the board in November is in danger of heading below trend, but also that incipient concerns about inflation aren’t justified given the first fall in wages since 2009. The investment data also confirmed the RBA’s general picture of 2013 -- the mining investment boom peaking and then pulling back, requiring more traditional growth stimulants (housing construction) to take its place. Iron ore and coal prices are down on where they were in November as well. Corporate profits were off 2.9%, seasonally adjusted, and down 1.7% on a trend basis after a fall in the June quarter. Company profits fell for a fourth consecutive quarter, driven lower by a 12.2% fall in mining profits, which is to be expected following the fall in commodity prices and the slowdown in China. Today's 1.5% fall in seasonally adjusted private dwelling approvals in October adds to the feeling the economy is slowing, especially after a 2% rise in September, though the trend estimate has been up five months now. Overall approvals fell 7.6% in October because of another big drop in the very volatile other dwelling series (which covers units, flats etc) of 18%. For the bank, however, this afternoon's announcement has an added complication: third quarter GDP figures are out tomorrow at 11.30am. They could validate a cut in rates with a low reading -- say 0.1 to 0.4% quarter on quarter or around 2.5% annual, against trend growth of 3% to 3.25%. If the bank fails to cut, it could look like mugs (or, given the time of year and the media’s love of clichés, scrooge) if GDP comes out on the low side. The GDP figures are shaping up to be a sluggish 0.5% or less for the quarter according to forecasts. Seeing growth was 0.6% in the June quarter (for an annual rate of 3.7%), a result around that level for the September quarter will still produce an annual rate of around 3.1%. But a result around 0.2% would see annual growth of around 2.7% (before any revisions), which would be below trend. There’s also labour force data out on Thursday that may well show unemployment trending up. Still, as the RBA noted in its minutes from the November meeting, "there was uncertainty about the overall pace of growth of demand in the economy over the forecast period". That’s still relevant because there’s better news from offshore. The Chinese economy is starting to gather pace and it's now looking stronger than in October, when the Reserve Bank board last cut interest rates. The final reading for the HSBC/Markit China manufacturing Purchasing Managers' Index for November came in slightly stronger than the flash reading last week: 50.5 v 50.4 (and 49.5 in October), and the first time the final reading had been positive (above 50) for 13 months. It follows the second positive month in a row for the official China manufacturing PMI for November which was 50.6 last month, up from 50.2 in October. Already some analysts are talking about growth in China next year of 8.3% or a bit more. It’s not all good news overseas, though: we learnt overnight that US manufacturing contracted in November, and there’s still the fiscal cliff to be negotiated by Congress and a re-elected President. So one possibility is that the RBA sits and does nothing and hopes stronger Chinese growth will tug the economy higher, rather than cut rates to give the economy a further jolt and to try and boost activity in housing. And then there's biggest factor of next year to consider: the 2013 federal election. Elections these days produce more cautious consumers ahead of polling day. But a decisive election result late next year could produce a surge in confidence and activity that we haven’t seen for the last year or more. So the question for the board is, is a resurgent China going to get us back to trend growth, or does it need to stick to its previous plan of stimulating housing to replace declining mining investment in 2013? If the latter, a rate cut is likely, because the housing sector simply hasn’t responded yet to previous cuts. A cut would take us back to GFC-era "emergency lows", but remember that unlike during the GFC, the government is currently taking a huge whack of demand out of the economy with its fiscal policy, not pumping stimulus in. The 2007 experience of the RBA lifting rates before an election as a government desperately tried to spend its way to victory are unlikely to be repeated next year. It's a more finely-balanced decision than many claim, but odds are the board will cut.

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One thought on “The RBA’s Chinese dilemma: Asian comeback clouds the picture

  1. Simon Mansfield

    Wow great angle – but as usual wrong call. The real issue is when is the RBA going to act like Swiss Bankers and start swapping China Dollars for foreign currency and start driving down the dollar to a level where Australia can maintain high wages on a domestic level but still compete internationally.

    At least we don’t have the usual junk about why don’t you hedge. Yer that’s right – we are way beyond the hedging period and the only businesses still able to hedge are the multinationals who have access to internal cash flows and expensive tax lawyers to make it all work. So with the dollar stuck at above 1.04 – I’d say this summer will be see exporters looking at who else to fire and how many more jobs can we ship off to India and the Philippines.

    Glenn Stevens should just resign and admit he failed yet again to manage the economic cycle as he has done ever since he got the overpaid gig. As for the bobbsey twins – there’s always tomorrow’s editon to admit you are both wrong. But I doubt it – more like some fluff piece on the glass being a quarter full.

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