Taking a Breather
Australia’s economy has outpaced many of the world’s advanced economies in recent years in addition to having mostly sidestepped the worst of the global slowdown of 2009. Having said that, the economy has not been without its challenges. More recently, these headwinds have come from abroad. The sovereign debt situation in Europe has had knock-on effects in other parts of the global economy, particularly in China, Australia’s number one export partner.
While the Australian economy continues to grow, the pace of that growth has slowed in each of the past two quarters. In fact, the 1.9 percent annualized growth rate in Q3 2012 was the second weakest outturn for economic growth in Australia since 2009. The Reserve Bank of Australia (RBA) has been acutely aware of the weakening in growth and has steadily reduced its benchmark lending rate, the cash rate, a total of 175 basis points over the past year and a half. The RBA’s decision to stay on hold at its meeting earlier this month surprised some market watchers who had anticipated another rate cut. Minutes from the February meeting of the RBA offer some perspective behind the decision to leave rates unchanged at 3.00 percent.
Mixed Outlook for Domestic Economy, Firming Seen in China
The minutes noted that recent data indicates, “growth in economic activity having picked up in the December quarter.” Official data for fourth quarter GDP growth are not due out until March 5th, but outside of one decent jobs report in November and a firming in building approvals, we are struggling to identify exactly what the RBA sees as a firming in economic activity. The minutes actually seemed to backpedal from that rosy assessment in subsequent lines, noting that business sentiment remained below average and that after a tepid pace of consumer spending growth in the third quarter, “growth in the December quarter may have picked up a little, although conditions varied for different types of retailers.”
Perhaps the most upbeat language in the report related to the outlook for China where, “a wide range of indicators showed that growth in the Chinese economy had stabilized.” Indeed, this assessment is in line with our own forecast for Chinese GDP growth, though we are not convinced that a high single-digit growth rate in China will be enough to buoy economic growth substantially in Australia. The persistently strong Aussie dollar will be a headwind to exports, particularly as Japan has embraced weak-yen monetary policy initiatives. Japan is Australia’s number two largest export partner. Further rate cuts later this year cannot be ruled out until we see hard data that confirm the stronger pace of growth that the RBA currently sees.