In a week where we learned that investment likely surged again in the third quarter and will spike again next year to a new record, commentators and economists have taken this to mean that the Reserve Bank should take the cash rate further into crisis territory. Simply because mining investment is now expected to surge 20 per cent next year, instead of the 33 per cent initially indicated in the second quarter. A more perverse commentary I have never seen. Indeed the recession call has been made again for 2013.
Now first things first, readers should relax. These same people were telling you that the inflation genie was out of the bottle in 2008 and that the Reserve Bank had to hike rates – they dutifully did so when the rest of the world was in a recession. In 2009 recession was the diagnosis and a cash rate of 2 per cent forever the cure. Since then we’ve had a recession call in one form or rather every year – the non-mining recession, the east coast recession, the argument that consumers had put their wallets away and the suggestion that fiscal policy was contractionary.
Every single one of these has proven to be false.
This is extremely important when readers try to assess the outlook for economic conditions – or even the state of play. That the Reserve Bank will actually slash rates I don’t doubt, they shouldn’t of course but that hasn’t stopped them in the past. Fools rush in. But the fact is, the global economy is accelerating and the domestic economy isn’t as unbalanced as commentators would have you believe – and the constant hysteria always comes to nothing.
Over the last three years consumption (private and public) has accounted for 85 per cent of the country’s growth. Mining investment – well engineering construction, most of which is mining (but not all) – has made up about 30 per cent. A fair size but only slightly more than exports at 25 per cent and public investment at 20 per cent. There is good balance there and we’ll probably see that again on Wednesday when we get the September quarter national accounts. The market looks for a 0.6 per cent lift this quarter!
For the remaining sectors of the economy that haven’t taken off – in particular housing – the price of money is not the issue and further rate cuts will not stimulate growth further. As I have argued before, confidence is the issue and rate cuts are serving only to weaken confidence, not strengthen it. Notice how confidence has actually deteriorated since the RBA started cutting rates. The good news is that there is a limit to how many times the RBA can keep cutting. This is important because it’s only when they stop cutting rates that confidence will be able to return to the market.
The main reason for this, is because without the carrot of lower rates, the debate will refocus away from absurd fictions to reality. Spruikers will have no choice because at the moment they’ve got this inconsistent marketing campaign going on: "the economy’s rubbish and the RBA needs to slash rates, but hey, equities are a buy!” Or whatever product they’re trying to flog. I could be wrong, we can’t rule out the printing press call here in Oz the way the public discussion is going.
I think the bigger problem we have is that people don’t know how to handle non-boom conditions in the non-mining economy. We had it so good pre-the GFC that people don’t know what normal growth is like. It’s ridiculous because non-boom conditions are being equated with recession, it’s a bizarre psychological phenomenon. People are even panicking over the unemployment rate – currently at 5.4 per cent and expected to rise to 5.5 per cent in November (update this Thursday).
Casting our gaze abroad, Friday night’s session didn’t leave us with much. The cliff theatrics took a step up on Friday night which weighed on markets. Nothing really new to add, just a growing discord and some comments from someone that they’re not even close to a deal. So US and European markets were basically flat. As to the data, very little guidance for the market. US Personal spending dipped in October (0.2 per cent) but this follows a strong gain the month prior and incomes were flat, after a decent gain. Over in Europe, inflation moderated to an above target rate of 2.2 per cent in November from 2.5 per cent, while unemployment rose to 11.7 per cent from 11.6 per cent.
As for the week ahead most of the focus will be on two key US releases – the ISM index (tonight and expected to dip a bit) and the US employment numbers on Friday. Currently forecasts are that employment will lift 90,000 in November while the unemployment rate is expected to remain at 7.9 per cent. There are a few other releases for the week, but I’ll discuss those on the day.
Note that data today includes retail sales for Australia (1130 AEST) alongside company profits. We also see TD’s inflation gauge. Otherwise we see a couple of Chinese PMIs around lunchtime.
Hope you have a great day and a great week.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.