For two years now, the Reserve Bank’s senior figures have been telling us that mining investment is slowing and will slow further and that Australia will have to transition back to more traditional sources of growth — mainly housing construction. And for months, the bank has been telling anyone who will listen — or read its reports, the various speeches and minutes form board meetings — that the “prudent course” is to watch and wait for monetary policy (the record-low rates) to smooth the path of the transition — as the final paragraph of successive post board meeting statements and minutes make clear”

“In their assessment and given the information available, the Board judged that the current accommodative stance of monetary policy continued to be appropriate to foster sustainable growth in demand and inflation outcomes consistent with the target over the period ahead. Members considered that the most prudent course was likely to be a period of stability in interest rates.”

But for the markets and excitable journalists, that hasn’t been clear enough. So every major economic statistic, from retail sales to employment, investment, building approvals, housing finance and construction work done, are constantly seen as possible triggering a rate cut (if weak), or a rate rise (if strong, though that has faded). And yet the RBA’s checklist has been there for everyone to see and apply to every set of figures.

Case in point: yesterday’s 2.2% fall in the value of construction work done was seen as being “worse” than the 1.9% fall forecast by the market. Given that the bank (and the government, which wants to get infrastructure spending moving) have been warning of declining investment, the fall in construction work isn’t a shock, and neither are the weak capital expenditure figures released this morning, and the falling investment intentions for the rest of the financial year. The capex numbers showed a 0.2% rise in capital spending in the September quarter seasonally adjusted, with spending down 5.9% in the 12 months to September (not a ringing endorsement of the burst of confidence the Abbott government was supposed to deliver). And expected spending is forecast to fall 7.5% next year, dragged lower — unsurprisingly — by mining.

What these figures are pointing to is a weaker than expected set of growth figures for the September quarter in next Wednesday’s national accounts — perhaps quarter-on-quarter growth of 0.1 to 0.3% (even zero growth according to some economists). Business indicators, government spending data and the September quarter’s current account data, all due out next week, will help set the final figure. But there’s a growing chance of annual growth dipping to 2% or less, if the quarter-on-quarter figure is low. That will work its way through to Joe Hockey’s budget bottom line, along with the weakening coal and iron ore prices.

“Last Friday’s cut in Chinese interest rates, and further cuts in market rates this week, will be the big driver of any change in thinking at the bank.”

Will this soft growth prompt the bank to shift from its current stance? This is what the bank said in the last Statement of Monetary Policy for the year, issued earlier this month:

“The outlook for domestic growth has not changed from that presented in the August Statement. GDP growth is still expected to be below trend until mid 2015, before picking up gradually to be a bit above trend by the end of 2016.”

Complicating this picture is the RBA’s view on the continuing strength of the dollar. As deputy governor Philip Lowe said this week:

“In terms of the exchange rate, the RBA has been saying for a while now that a lower value of the Australian dollar would be helpful from an overall macroeconomic perspective. If the exchange rate is to play its important stabilising role, it needs to go down when the terms of trade and investment are declining, just as it went up when the terms of trade and investment were rising. To date, as we expected, we have seen some adjustment, but if our assessment of the fundamentals is correct we would expect to see more in time.”

By the way, there was nothing new in that, and yet the markets and quite a few commentators took that to mean the bank was going to cut interest rates, and up went the market for no real reason (and ignoring a big fall in iron ore prices to well below US$69 a tonne). The dollar went down as well, but the view didn’t last past trading in Europe and the United States last night — the dollar regained ground and traded around 85.50 US cents in early Asian trading this morning, and approaching the level it was on Tuesday before Lowe spoke.

The value of the currency is one key trigger for a change in the bank’s stance on monetary policy. The other is the health of the Chinese property (especially housing) sector. That’s why last Friday’s cut in Chinese interest rates, and further cuts in market rates this week, will be the big driver of any change in thinking at the bank. Next Tuesday’s meeting is the last for two months and that will make it unlikely to do anything dramatic on rates (though it can still change rates over summer if there’s a sudden burst of bad news). If the bank changes its view on rates next week or in early 2015, then it is possible the slide in Chinese property prices will be seen as gathering pace, posing a threat to our weakening resources sector, which will in turn place pressure on the economy’s transition.

That’s the issue to watch, rather than the flow of domestic data, even if that shows the economy dipping still further.

Peter Fray

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