As expected Reserve Bank Board holds rates steady at March meeting

As we expected the Board of the Reserve Bank decided to hold the cash rate
steady at 3% following today's Board meeting.

There were minimal changes in the wording of the Governor's statement from
the statement issued on February 5 following that "no change" decision.

Of most importance was retaining the term "the inflation outlook, as
assessed at present, would afford scope to ease policy further should that
be necessary to support demand". Maintaining that statement indicates that
the Board retains an easing bias and future decisions will be impacted by
the growth profile.

By far the most important data release since the last meeting was the
Capital Expenditure survey for the December quarter. This survey provided
the first estimate of investment plans for the 2013-14 fiscal year. It also
provided the fifth updated estimate for investment in 2012-13. The news on
2012-13 was quite poor with substantial downward revisions to investment
plans. However, partly because the 2012-13 number was so low it was not too
big a stretch for the 2013-14 investment plans to show a solid increase.
Indeed by our calculations those plans indicated an 11% boost in investment
in 2013-14. That evidence is likely to have been a key factor in the Bank's
decision to hold rates steady. Indeed, while investment outside mining
continued to be assessed as "relatively subdued" the Governor did qualify
that with "recent data suggest some prospect of a modest increase during
the next financial year". Hence from the Bank's perspective progress in
rebalancing growth towards the non-mining sectors appeared to be underway.

Another aspect of the Capex survey indicated that the peak in resource
investment might be further out than previously assessed. However, there is
considerable uncertainty around those estimates and the Bank, prudently,
retained its general assessment that "the peak in resource investment is

The themes that have figured consistently in previous statements were
repeated today – moderate growth in private consumption; near term outlook
for non residential building subdued; exports strengthening; public
spending constrained; inflation consistent with the medium term target; and
low demand for credit.

The wording on the housing market changed. Whereas in February it was
described as: "prospective improvement in dwelling investment", it is now
described as: "appears to be slowly increasing". This somewhat more
positive assessment is the direct result of a modest 2.1% reported increase
in housing construction for the December quarter. Higher dwelling prices
and rental yields are also noted.

The conviction that inflation will remain consistent with the medium term
target is given more support in this statement. Whereas the February
statement predicted that a soft labour market would be working to contain
pressures on labour costs this statement notes that this result has indeed
been "confirmed in the most recent data". In the February statement the
Bank raised the prospect of businesses focussing on lifting efficiency to
contain wage pressures and this sentiment is retained.

The description of the international situation is largely unchanged
although the Governor appears to be a little more confidence around
downside risks. Compare "downside risks appear to have abated, for the
moment at least" (February) with "downside risks appear to have lessened in
recent months".

The description of financial markets includes a more upbeat assessment of
the sharemarket, "share prices have risen substantially from their low
points". However, the Bank continues to point out that financial markets
remain vulnerable, adding "as seen most recently in Europe".

The key theme is repeated in this statement, "the full impact of this
[easing in monetary policy] will still take more time to become apparent,
there are signs that the easier conditions are having some of the expected

Despite the recent fall in the AUD (substantially more in USD terms than in
TWI terms) the Bank continues to point out that the exchange rate remains
higher than might have been expected.

Conclusion – expect the next rate cut by June.
This statement is clearly structured to signal that the Bank retains its
easing bias but will be patient before cutting rates further.

We believe that there will be another cut in this cycle but not until
around June. Forces that are most likely to highlight the need for lower
rates will be around: an ongoing softening in the labour market; contained
price and wage pressures; a disappointing response from business in terms
of investment; and a housing recovery that, while quite vibrant in Sydney,
will not be replicated around the country. We also expect that the
Australian dollar will be drifting higher through to mid year particularly
as foreign investors rebalance their appetite back towards high yielding
Australian assets.

Bill Evans
Chief Economist
Westpac Institutional Bank


This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.



Published in Australian Economy
Friday, 27 January 2012 13:17

Global Economy - A Little Less Scary


The past few weeks have been interesting. Sovereign rating downgrades in Europe have intensified. The World Bank and now the International Monetary Fund (IMF) have slashed their growth forecasts for this year and warned of the risk of a global downturn worse than that associated with the global financial crisis. Yet share markets and other  risk trades  have almost said “ho-hum”. So what’s going on? Our take is the markets are telling us that a lot of the bad news has already been factored in. The ratings downgrades were flagged back in early December and the World Bank/IMF growth forecasts downgrades have only just caught up to private sector economists.1

This is not to say we are out of the woods, or that volatility will disappear. But it does seem the risk of a global financial meltdown has receded  somewhat and that the global economic  recovery appears to be continuing.

Europe – reduced risk of a financial blow-up Europe is on track for a mild recession  but the risk of a financial blow-up resulting in a deep recession  seems  to have receded  a bit. The provision of cheap US dollar funding by the US Federal Reserve and very cheap euro funding for three years by the ECB under  its long-term refinancing operations appears to have substantially reduced the risk of a liquidity crisis causing banking  collapses. It has also reduced pressure  on European banks to sell bonds in troubled countries.

We would have preferred the ECB to have directly stepped up its buying of bonds in troubled countries, but its back door approach has nevertheless seen a sharp expansion in the ECB’s balance sheet. In other  words, it appears to have embarked on quantitative easing, albeit it wouldn’t admit  it.

Reflecting this, bond yields in Spain, Italy and France and spreads to Germany – which were surging towards the end last year – have settled down. Similarly, European  bank stock prices appear to have stabilised.

This is not to say Europe is no longer a source of risk. It still is – it’s doubtful that even with the proposed debt restructuring Greece’s public debt is on a sustainable path, fiscal austerity is still bearing  down on growth across Europe, more ratings downgrades are likely and monetary conditions are still too tight. But the risk of a meltdown appears to have receded. What’s more European business conditions indicators have picked up in the last two months.

In November, we referred to three scenarios  for Europe:

1.  Muddle through – i.e. a continuation of the last few years of occasional  crises temporarily settled by last minute bare minimum policy responses.

2.  Blow up – in which a financial crisis and deep recession  see a break-up of the euro.

3.  Aggressive ECB monetisation – with quantitative easing  heading off economic calamity, albeit not quickly enough to prevent a mild recession.

Recent action by the ECB appears to have reduced the chance of the ‘Blow up’ scenario (probably to around 25%). The costs of leaving the euro for countries like Greece (which would include a likely banking  crisis as Greek citizens rushed to secure their current bank deposits,  which are all in euros, and default on its public debt anyway) still exceed the likely benefits, so it still looks like the euro will hang together. Overall, the most likely scenario  appears to be some combination of ‘Muddle through’ but with more aggressive ECB action preventing it from spiralling into a ‘Blow up’.


The US – no double dip (again)

During the September quarter a big concern was that the US economy would ‘double dip’ back into recession. This, along with escalating worries about Europe and the loss of America’s AAA sovereign rating, combined to produce sharp falls in share markets.  Since then, US economic data has turned around and surprised on the upside:

>   Retail sales growth has hung in around 7% year-on-year despite a sharp fall in consumer confidence

>   Jobs growth has picked up

>   Housing-related indicators have stabilised and in some cases started to improve, and

>   Gross domestic product (GDP) growth has picked up pace again after a mid-year softening.

Earlier concerns about a 1.5% to 2% of GDP fiscal contraction in 2012 dragging growth down have faded as Congress has agreed to extend payroll tax cuts and expanded unemployment benefits for another two months, with a good chance they will be extended for the full year.

More fundamentally, the US appears to be starting to enjoy somewhat of a manufacturing renaissance (in stark contrast to Australia!).  there are numberous anecdotes of global companies moving manufacturning to the US including Electrolux, Siemens, Maserati and Honda (which chose to build a new ‘super car’ in Ohio rather than in Japan). Furthermore, General Motors is now the world’s top selling car maker again. Could a decade-long fall in the US dollar and very strong productivity growth be sowing the seeds of a long-term turnaround in America’s fortunes?


China – so far so good

Chinese economic growth has slowed to 8.9%, but there is no sign of a hard landing. Export growth has slowed sharply but so too has import growth and in any case net exports have not been a contributor to growth in recent years. Moreover, retail sales growth has held up well and fixed asset investment has slowed only slightly.

Furthermore, falling inflation (from 6.5% in July to 4.1% in December) and a cooling property market, evident by falling prices in 52 of 70 major cities in December, and falls in sales and dwelling starts  provide authorities with the ability to ease the economic policy brakes. And there is plenty of scope to ease.   Large banks are currently required to keep a record high 21% of their assets in reserve, the key one-year lending rate is at 6.6%, the budget deficit was just 1.1% of GDP last year and net public debt is around zero once foreign exchange reserves of US$3 trillion and other assets are allowed for.

After doubling between October 2008 and August 2009 on global financial crisis related stimulus and a growth recovery, Chinese shares fell 38% to the low early this month as investors feared tightening policy would result in a hard landing.  With Chinese price to earnings multiples having fallen back to bear market lows and policy starting to ease again, decent gains are in prospect over the next few years.


Global growth

The next chart highlights the improvement recently in global economic indicators. Manufacturing conditions in most  major countries were in decline into the September quarter, but in recent months have either stabilised or started to improve.

What does this mean for investors?

None of this is to say it will be smooth sailing going forward. Europe’s problems are a long way from being solved, uncertainty remains regarding fiscal policy in the US, Chinese authorities will need to ease soon to ensure a soft landing and the Reserve Bank in Australia also needs to cut more. On top of this, after a solid start to the year shares are getting a bit short-term overbought, some short- term sentiment measures are a bit elevated and the hot and cold pattern of US data releases warns we may soon see a cold patch. So shares are vulnerable to a short-term setback (with February often a soft month in contrast to the seasonal strength seen in January).

However the improved global economic outlook and reduced tail risks regarding Europe suggests 2012 should be a better year for shares and other risk assets.  This is also supported by the fact that shares are starting the year well below year ago levels.

Signposts investors should watch  include: the size of any share market  setback  in the seasonally weak month of February; bond yields in Italy, Spain and France; the US ISM manufacturing conditions index; and Chinese money supply growth.

Dr Shane Oliver, Head of Investment Strategy and Chief Economist

AMP Capital Investors





1 Our global growth forecast for 2012 is 3%, which compares to the IMF’s new forecast of 3.25% and the World Bank’s new forecast of 3.4% (if purchasing power parity weights are used to combine  countries).


Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at January 2012.





Published in Australian Economy