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Our own fiscal cliff likely to tip RBA's hand

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The week ahead with Michael Pascoe

While Tuesday’s Reserve Bank board meeting captures the most attention, the Australian Bureau of Statistics is pulling out all stops to give the RBA plenty to think about.

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To the extent that betting on an RBA decision can be a sure thing, today's economics releases make an interest rate cut tomorrow more than odds-on.

According to the Australian Bureau of Statistics' business indicators' survey, wages in the September quarter recorded their first fall since the GFC-smashed September quarter of 2009.

After a flurry of economic data, the RBA could be poised to cut rates again.

After a flurry of economic data, the RBA could be poised to cut rates again. Photo: Louie Douvis

It was only a 0.2 per cent dip and it's only the seasonally adjusted series – the better trend estimate was up 0.7 per cent – but that still summarises a rather disparate bunch of figures that add up to a stronger argument for a rate cut than holding off until February.

October retail sales numbers were nothing to write home about either. Discounting the flighty seasonally adjusted figure (flat from September to October), the trend series recorded a 0.2 per cent rise. With the odd revision, the trend series now prints as 0.2 per cent for each of the past four months. It's growth, but not much growth.

Combine it with the business indicators' story on wages and falls in company gross operating profits (down 1.7 per cent trend, 2.9 per cent seasonally adjusted) and the case for easing monetary policy again builds further.

The RBA's tough job is to set policy to deal with where the economy might be in a year's time, but softening evident today despite a series of rate cuts lowers the base for stimulus to take effect.

One number to come

The final statistical assistance for the RBA board meeting is October building approvals numbers released at 11.30 tomorrow. Building approvals figures have assumed a greatly enhanced importance in deciding policy as both the RBA and Treasury are betting on a housing industry resurgence to pick up the promised slack from the construction phase of the commodities boom easing.

In a recent speech, governor Glenn Stevens reiterated policy makers' bafflement about why housing construction had been “unusually weak”. Said Stevens:

It is not clear, actually, that the degree of weakness has been adequately explained. Various explanations have been offered – interest rates too high, housing prices falling, zoning restrictions, planning delays, construction costs, lack of 'confidence', all have featured. At present, at least some of the pre-conditions one might expect to be needed for higher construction seem to be coming into place. Interest rates have declined, dwelling prices seem to have stopped falling, rental yields have risen, and the availability of tradespeople is assessed as having improved. We have, moreover, seen a rise in approvals to build. So there is some evidence of a turning point, albeit a belated one.

Thus tomorrow's figures will be very carefully weighed. The fledgling rise in building approvals needs to be built upon, so to speak. It would take a most unusual and unexpected surge in such approvals tomorrow to stay the RBA's hand. A dip or flat performance in those stats at 11.30am should mean the governor's announcement at 2.30pm is a foregone conclusion.

GDP result

The September quarter national accounts on Wednesday will show an Australian economy that remains strong by international standards. We continue to do much better than we tend to believe, but that view out over the next 12 months is likely to call for getting some monetary policy retaliation in first.

The breakdown of business indicators by industry show wildly varied performances, but underline some of the known drags on the economy, as well as throwing up some questionable results.

For example, did trend company gross operating profits in the financial and insurance services sector really jump by 24.4 per cent in the quarter, let alone soar by 44.2 per cent seasonally adjusted? Trend wages and salaries in the sector were reported as falling by 3.5 per cent.

On the other hand, it comes as no surprise to any journalist that the company gross operating profits in information media and telecommunications were down. The trend estimate for wages and salaries was off 1.1 per cent or 9.9 per cent seasonally adjusted. I suppose I should be glad I concentrate on the trend numbers.

Still out there beyond the business indicators is the public sector impact. For all the chatter about politically-damaged consumer confidence and the impact of North Atlantic crises and whatever China is up to, it is Australia's own little fiscal cliff that is proving the single biggest drag on growth.

State governments running into fiscal brick walls and the Federal Government pursuing a nominal surplus at any cost mean the RBA's is forced to loosen monetary policy in an attempt to compensate.

Enjoy your rate cut.

Michael Pascoe is a BusinessDay contributing editor.

98 comments

  • Nice article but no mention of the massive liquidity trap that will be the talk of 2013 in australias business and economics circles.You can only play russian roulette for so long.

    Commenter
    peter thomas
    Location
    richmond victoria
    Date and time
    December 03, 2012, 12:57PM
    • It makes no sense, banks almost giving free loans and administration thereof, at a time house prices and therefore foreclosure prices fell and cant recoup full loan value, with addition the market on a long downward spiral. the reality bluff association RBA seems to have levers pulled by Govt. Here is advice, raise rates and remove strugglers, house prices crash to reality, people will build and buy thus feed the jobs and economy. Thats how it is supposed to work, and potential buyers are now awaiting to force this.

      Commenter
      BRIAN
      Location
      Sunbury
      Date and time
      December 03, 2012, 2:09PM
    • Yes, it no longer matters how much the RBA cuts rates because the punters have grown tired of debt. Even the lowest rates in history haven't been able to make house prices rise. Watch out for the mother of all property crashes in 2013.

      Commenter
      Foxy Trollwolf
      Location
      Australian Property Forum
      Date and time
      December 03, 2012, 2:12PM
    • Brian of Sunbury, your thinking is almost as interesting as Cliff Klaven's theory that you can improve your brain by drinking beer, thereby killing off the slowest moving brain cells that are holding you back.

      Commenter
      Bomber
      Location
      Sandringham
      Date and time
      December 03, 2012, 3:15PM
    • Am impressed readers are so aware. Most government ministers are heavily invested in property, rentals, and with loans for such, thus heavy conflict of interest to the housing area, and access to taint RBA and CPI. the REST OF THE WORLD TOOK A REALITY CHECK. They wont let much change but they do fear the buyers new revolt of waiting to buy thus forcing a change. So how will ministers influence this, yes keep interest rates low, but, rents never fall, so why not be satisfied with that scam, look at USA 400k houses selling at 25k but rents remained unchanged, investors did not lose as interest rates lowered and rents stayed high. The other problem was the over pricing of housing saw materials treble in price to suit, and when these prices drop, then we know soon after a balance shall occur.

      Commenter
      BRIAN
      Location
      Sunbury
      Date and time
      December 03, 2012, 3:24PM
    • You might believe that borrowing money is bad - but borrowed money is what builders and customers need to build houses. This article should be asking why banks are not lending (which they are not). And it is because banks are not lending that buildings are not being built.

      For instance - lenders (banks) demand that any developer must pay up front any architects fees, planning permits, advertising, etc and have at least 75% of the building pre-sold before they will lend them a cent. This impact is huge, and it trickles right down the food chain.

      Ask any builder how hard it is to get finance right now and then you'll understand why nothing is being built - and we need buildings to house all the new people coming in to the country.

      There will be a huge housing shortfall soon. But then that's possibly what the banks want because that forces up housing prices so they then hold a stronger mortgage. Manipulation of the market at its worst!

      Commenter
      Gale Force
      Date and time
      December 03, 2012, 4:00PM
    • You know what they say, the more the masses scream property crash, the more you realise its a time to buy... buy when they are screaming property crash, sell when they are screaming property boom. Warren Buffett style.

      Commenter
      TheGoodAccountant
      Date and time
      December 03, 2012, 4:17PM
    • +1 Brian count me in

      Commenter
      Andy!
      Location
      Melbourne
      Date and time
      December 03, 2012, 5:02PM
  • Rate cuts are as good as useless at this late stage of the game. It is akin to pushing on a piece of string. Early next year (mid Jan to early March) will be a bloodbath. The economy is cactus, business models are so far out of kilter its not funny. We have ridiculously high overheads (especially wages), too much capacity & no pricing power. The idea a 1/4 point rate cut is some magic bullet is laughable. Batten down the hatches and hang on for grim death.

    Commenter
    Brisbane Bear
    Location
    Brisbane
    Date and time
    December 03, 2012, 1:04PM
    • +1
      The only ones making money these days are the criminals. If you can't beat them joint them!!!

      Commenter
      Figgy
      Date and time
      December 03, 2012, 1:34PM

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