Australia under the microscope

November 9, 2012, 3:18 pm Peter Switzer Yahoo!7

When you take a close look at how the Australian economy is performing it becomes clear that the RBA had plenty of room to lower rates on Melbourne Cup day.

If you weren’t lucky enough to back Green Moon in the Cup, you might have been sweating on another interest rate cut from the Reserve Bank (RBA), but we lucked out there. So, was it a case of a tightwad or killjoy attitude from our central bank, with a public service or accountant’s mentality? Or was it wisdom?

Let’s put the Oz economy under the microscope and see if the conservative decision from Governor Glenn Stevens and his board was justified.

Being a born optimist unless bad news stares me in the face, we will spotlight the good news on the economy first.

The good news
Here’s the list and its implications for interest rates:
• Over the past three weeks, the wholesale price of fuel has fallen by 9.1 cents a litre to 131.3 cents a litre – a 3-month low – and CommSec expects the national average pump price to ease by a further 4 cents a litre over the next fortnight. This is good for inflation and a rate cut.
• Retail spending rose by 0.5% in September but over the September quarter, retail trade fell 0.1% in real terms, and while good for the month, it was weak for the quarter, helping the case for a cut.
• The TD Securities-Melbourne Institute monthly inflation gauge rose by just 0.1% in October to stand 2.4% higher than a year ago, which makes it easy to cut rates because inflation is contained.
• Mining has become the biggest driver of the Australian economy. The gross value added of the mining sector was $139.95 billion in 2011/12 but these are old figures and the sector is now more subdued, making a rate cut more doable.
• For the three months to October, home prices rose by 0.5%, but were still down 1.1% on a year ago, so we’re hardly looking at a housing bubble. A rate cut is still an option.
• Dwelling approvals rose by 7.8% in September after lifting 8.8% in August and slumping 20.2% in July. So in net terms we’re still down over the quarter, and anyway, the lift in approvals was concentrated in NSW in response to a sharp increase in grants for homebuilders.
• Renovation approvals by local councils soared by 11.5% in September to six-year highs, which could worry the central bank but these figures have been in the doldrums for some time.
• There was a surprising rebound in economy-wide spending in September with the Commonwealth Bank Business Sales Indicator (BSI) rising by 3.9% in September – marking the biggest monthly gain in four and a half years. This reading reacts well to rate cuts. Once again the BSI is improving but it has been down for some time as well and the less volatile trend estimate of spending was largely flat in September for the third month!
• The number of new owner-occupier housing loans rose by 1.8% in August – marking the best growth in nine months but isn’t this something we need to encourage after a down period?

• New car sales rose by 4.7% in September after rising by 4.3% in August.

The bad news
Let’s now look at bad tidings. Here they are:
• The number of job advertisements fell for the seventh straight month, dropping by 4.6% in October to stand 15.0% lower than a year earlier.
• Unemployment shot up 0.3% to 5.4% in September and both of these labour market readings say a rate cut is not a bad idea.
• The Performance of Services index rose by 0.9 points to 42.8 in October. A reading below 50 suggests contracting activity. The sector has contracted for the past nine months!
• The RP Data – Rismark Home Value Index says capital city home prices fell by 1% in October after a 1.4% rise in September. This is good news but it’s not gangbuster stuff.
• The Performance of Manufacturing index rose by 1.1 points to 45.2 in October. It was the eighth month that the index has been contracting. The index of selling prices fell from 41.2 to a decade low of 39.6, while export orders fell from 48.3 to a record low of 29.6! This is worrying stuff!
• Import prices fell by 2.4% in the September quarter while export prices fell by 6.4% and are down 13.4% on a year ago.
• Private sector lending rose by 0.3% in September after rising by 0.2% in July and August. This is weak but at least its positive.
• New home sales hit 15-year lows in September and so a rate cut would not hurt this important economic indicator.
• The Consumer Price Index rose by 1.4% in the September quarter, which has worried the RBA, but there’s carbon tax in this inflated figure.
• Business confidence improved marginally in the September quarter, but remains in negative territory.

• Consumer confidence is lifting but is historically low and also in negative territory.

Conflicting views

As you can see, the good news mainly says yes to a rate cut while most of the bad news screams it out. The RBA has played conservatively and I hope they’re right, but my microscopic view reveals that they’re not. What do you reckon?

Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds. www.switzersuperreport.com.au

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