The most fascinating aspect of the current domestic policy debate is that the mining boom is actually being used as a reason for the Reserve Bank to slash rates. Can you believe it?

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.

More from Business Spectator


Please login or register to post comments

Comments Policy »
As usual, the voice of sanity! (SCOREBOARD: Mining mischief, December 3.)
It's very hard to believe that we are not headed for a recession when all I see are shop after shop closing down (SCOREBOARD: Mining mischief, December 3). Many of the people I meet are losing their jobs. Many sub contractors cant find work, etc, etc, etc. I don't believe economists because not one of them saw the last financial collapse coming, and it seems that, just like politicians, not one of them learns from history!
"There is a limit to how many times the RBA can keep cutting" - Of course the limit is, in fact, 0% interest (SCOREBOARD: Mining mischief, December 3). The focus soon moves to one of minimizing losses rather than seeking a return! Greg Stevens has already suggested that investors should go elsewhere (other than banks)for a return on their hard earned dollars. Though I am not sure about his wisdom (or liability issues) in suggesting buying equities! When major global Central Banks continue to lower rates on one hand and start creating fresh money out of thin air, you just have to start seeing that financial markets are nothing short of a con. The resulting figures trumped up by tax deprived governments cannot be taken seriously.
I don't know where John Baker (8.28am) lives, but the opposite is happening where I live. The economy is robust as two major shopping centers are expanding, spending millions of dollars and providing employment (SCOREBOARD: Mining mischief, December 3). Houses sales are also robust, albeit at reduced prices.Car sales are at record levels as is overseas travel. This does not sound like an economy on the edge of a recession. Adam is exactly right, and John is a good example of the negativity that Adam has been writing about for months.
John Baker (8.28am), you couldn't have made a truer comment. Adam Carr doesn't seem to live on the same planet that I do (SCOREBOARD: Mining mischief, December 3).
I'm with you John (8:28am) - Economists all rave on like they know what's happening but none of them can actually predict anything major that happens. No other 'profession' could could get it as wrong as economists do and still be taken seriously (SCOREBOARD: Mining mischief, December 3).
While on the national view a technical recession may have been avoided, state regional and sector statistics provide a less encouraging storey (SCOREBOARD: Mining mischief, December 3). Fort example there is plenty of direct evidence of retail closures, high rate of insolvency, vacancies, rent reductions and higher regional unemployment.
Confidence to the housing sector is substantially provided by the belief that housing prices will probably not fall and may well rise. Prior to the GFC those beliefs were underpinned by the resources and investment boom.
However historically proven relationship between interest rates, housing prices and level of activity is also component of that confidence.
Well said John (8.28am). One thing I have learnt from people predicting our economic future is that they are usually wrong. No one knows what is going to happen, better to err on the side of caution (SCOREBOARD: Mining mischief, December 3).
The way I see it is along the lines of swings and roundabouts. (SCOREBOARD: Mining mischief, December 3).
I'm in WA servicing the resource and energy industries. There is still an abundance of work out there if one is prepared to go look for it, punt for it, and then deliver on it. Not as much as earlier in the year, but a lot more than 2009.
The real cost to all current projects is not the MRRT, the carbon tax, the State's levy etc., but the paucity of good management top to bottom.
When you have project management that has no idea on relating to the Australian workforce, when management allows the HR bunnies to run the projects with an iron fist, when project managers have so little commercial nous, then you have cost blowouts - not because boofhead rigging scaffolds is demanding unrealistic wages.
The economists et al that make these predictions are so far removed from any reality of the workplace, it would actually be amusing if it were not so scary.
Instead of burying oneself in unneccessary debt such as plat screen tv's and the latest HSV, pay cash and put a bit aside for "just in case". You might well find that your quality of life actually improves.
Reducing interest rates may make life easier for over-borrowed home buyers, but it doesn't do much for small businesses that can't get finance (SCOREBOARD: Mining mischief, December 3).
The one thing that would support employment would be some liberalisation of our labour hire laws, but that is unlikely to happen, hence the reliance on the blunt and dumb weapon of lower cash rates.
Is the author actually suggesting that lower interest rates are not a stimulating factor for the economy? (SCOREBOARD: Mining mischief, December 3)
Leave rates where they where six months ago and you would have seen the decimation of the building industry. Retail would be undergoing the death of a thousand cuts and the dollar would likely be around a dollar ten US – with exporters and import competing industries joining retails toturous decline.
Confidence would be falling down into a bottomless pit.
The RBA needs to get the rate right for the non-mining sectors, setting the right conditions for stabilisation and then the return of activity and confidence will follow.
Tony Elsom (9.04am) - Not sure where you live either but the view of John Baker et al is what I'm seeing in Melbourne (SCOREBOARD: Mining mischief, December 3).
House sales are far from robust at a clearance rate of around 60%, even with significant price drops, and the only reason car sales are up (and NOT locally produced cars either which is where all the employment is) is that virtually anyone can buy a new car for zero deposit and zero interest at the moment. Overseas travel is up, not in and of itself, but at the expense of internal holiday travel and because of the exchange rate, which is being partly held in check by the interest rate drops we've had, which Tony and Adam don't approve of. Just ask any motel owner in a traditional Australian holiday area, and see how badly they're doing.
Over the weekend there was a trade show that I'd normally exhibit at but I couldn't justify the cost this year. According to those that I've spoken to who were working there, the people came but they spent very little. Adams insinuation in paragraph 2 or 3 that consumers haven't put their wallets away to at least some degree is breathtaking. In my business, revenue is down both on-line and in the real world, but I'm doing better than 90% of my colleagues.
Adam has been singing from the Chicken Little song book all year, but despite all the rate drops, the projected GDP rate continues to fall and inflation is under control. Doesn't look like an economy accelerating to me. And to top it off we're about to enter the time of year when business closures usually hit their peak, when owners are unable to meet their holiday pay obligations, or immediately following the Xmas rush. If Gerry Harvey is right, lots of them are about to go belly up.
The elephant in Adams room is definately the fact that despite all these rate cuts (and US, UK etc printing) his robust surging and above trend economy has failed to encourage even a vaguely alarming inflation result (SCOREBOARD: Mining mischief, December 3).
Travel around. You can see a slow down is affecting smaller towns and cities, but isn't as obvious in the capitals (SCOREBOARD: Mining mischief, December 3).
Whilst we continue to be governed by the childish behaviour of parliament, there is a risk of the slow down becoming a recession. People recognise this and are saving, just in case.
A lowering of interest rates will lead to a lowering of the dollar, which will lead to an increase in the viability of exports (benefiting exporters across the board, with a flow on to employment), and make Australian goods more attractive locally.
The US economy is making a slow recovery, but when it does the AUD to US rate will move quickly. The Europeans are in a hole facing their 'recession they had to have', and when they come out the other side they will be stronger, again affecting the AUD relative to the Euro.
But before these things happen MUST address our here and now dilemma of lowering interest, to reduce the trading rate of the dollar, to keep people working (although it's just one of many steps that need to be taken).
We need to keep addressing our GDP rate, as an importance cornerstone of our economy. That, wages and taxation are all area's where attention is needed.
As they say, a smart man learns from his mistakes, a wise man learns from the mistakes of others. Look at the US and Europe and learn from their mistakes.
Big picture counting gives us concepts like… the last 3 years consumption (public and private) has accounted for 85% of growth (SCOREBOARD: Mining mischief, December 3). But this “grossed up” economics. And while on the national view a technical recession may have been avoided, state, regional and sector analysis provides a less convincing theory..
There is plenty of direct evidence of retail and manufacturing closures, high rates of insolvency, commercial vacancies, rent reductions and specific and or regional underemployment when numbers are broken down by state, region and or sector. And regardless a 20% increase in mining investment next year won’t help those in trouble.
“Grossing up” fails to explain wider analysis.
Confidence in the housing sector is largely based on belief that housing prices will probably not fall and may well rise. Prior to GFC that belief was underpinned by a resources boom thereafter GFC an investment boom. So Australia did not bottom out like the rest of the world, but housing prices and building commencements have taken a slap.
The blunt instrument of regulating inflation is interest rate policy. Historically low interest rates stimulate turnover then price – or put it another way, low interest rates increase activity and fear of missing out. So buyers hop in. Not pretty but that’s the way it is. And there’s the rub – interest rates feed-back into confidence.
Of course there are some who perhaps rightly disapprove of the industry or as an investment class and will find reason not support it.
But unfortunately it is the case that interest rates are also the blunt instrument by which we regulate our dollar – and a high dollar is currently killing our manufacturing.
So if private and public consumption and mining is not the cure for all – then what, who and when do we sacrifice to assist those hurting?