Rates cut. Well der!

December 5, 2012, 1:45 pm Peter Switzer Yahoo7

In a welcome but long overdue admission, the Reserve Bank has acknowledged businesses are doing it tough and lowered interest rates.

Psst, let me let you on a little secret — when business confidence is negative or at very low levels, you can guess it’s because there’s something wrong. It could be low sales or low profits. Then again, it could be high costs or it could be worrying government policy.

And guess what? All of these business challenges are going on right now but surprise, surprise the people trained to know all of this — economists, Treasury officials and the mob at the Reserve Bank (RBA) — all have seemingly missed this for over a year!

Sure more economists have jumped on board in recent months to side with me that this Aussie economy needed interest rate help, but it took them longer than was necessary. So how come?

Times are a changin’

There’s a snooty nosed attitude to anecdotal surveys around business and consumer confidence and more a reliance on often old data on the economy. I also think that there isn’t a good enough understanding of what a two-speed economy means and what is the new inflation environment with the rise of cheap Chinese imports, the arrival of the internet as an alternative place to do your buying and what this means for small business trying to achieve price rises from both bigger business customers and the new saving-oriented Aussie consumer.

Young economists, or flexible-thinking older economists, would be reworking economic models on what is happening now, and I bet those models will be different in five years time, which will lead to better forecasting than what we’re seeing now.

Let me alert you, predictions by economists on the big economic issues are about as reliable as a tip from a jockey in a Melbourne Cup, and if you know nothing about racing — that’s unreliable.

Data watch

To work out why the RBA wisely cut rates on Tuesday, just look at the recent run of data.

Late last week we learnt that business’ plans to invest were being cutback at a rate of knots. In the space of a few months, mining investment over this financial year has been paired back from $119 billion to $109 billion and mining investment spending growth has gone from a big 40% to 17%. That’s a huge downward revision.

And this means the growth of total business investment has gone from 19% to 5% and that’s why economic growth forecasts have been brought down from over 3% to something between 2-3%. By the way, the Gillard Government needs at least 3% growth to pull off its precious budget surplus and that’s why Finance Minister Penny Wong worked back over the weekend with the Razor Gang to find more savings out of the public service.

Gloomy Monday

And then on Monday, the bad news continued and together screamed out a rate cut is needed, especially if Ms. Wong and her team actually do find more ways to cut the Government’s demand for the economy, which is what less spending means.

This is what Monday showed us:

  • The RP Data – Rismark Home Value Index of capital city showed home prices were unchanged in November after a 1.0% fall in October and they’re down 0.1% for the year.
  • Company profits fell for the fourth straight quarter, dropping by 2.9% in the September quarter and so profits are 13% lower over the past year.
  • The Performance of Manufacturing index fell by 1.6 points to 44.6 in November, which means the sector has contracted for nine months in a row!
  • So much for Christmas cheer with retail spending unchanged in October after rising by 0.5% in September. Annual spending growth is now down from 3.5% a month ago to 3.1%.
  • ANZ jobs ads, a good forewarning indicator of what will happen to jobs, fell in November by 2.9% after dropping 4.6% in October. They are now at the worst level since January 2010 and have shrunk for eight months in a row!

More rate cuts needed

But there was some good news, which could be bad news with the TD Securities-Melbourne Institute monthly inflation gauge falling by 0.1% in November, which leaves the annual rate at 2.5% higher than a year ago.

If I wanted to go back further, I could dig out other solid reasons for more rate cuts and in case you missed it, the professional markets think the cash rate of interest will go from 3% to 2.5% by next year some time. That’s probably more drastic than I would be predicting, but if the RBA had left this latest cut until February, then its lateness might have made this 2.5% forecasted rate spot on.

When I was asked whether we needed another rate cut, I felt like replying: ‘Well der!” However, I was too polite to say it but I was thinking it.

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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