Reserve Bank hasn't finished yet by a long shot
THIS was the rate cut we had to have, and there will be more of them as the Reserve Bank attempts to engineer a baton-pass from a slowing resources boom to the rest of the economy.
A record $268.4 billion had been committed to resources and energy projects in Australia by October, according to the Bureau of Resources and Energy Economics, and the boom will fan out into the economy from here, as new and expanded projects begin producing and exporting, and an army of contractors that builds mines and LNG plants is replaced by another army of contractors that operates and maintains them.
After generating more half Australia's economic growth in the past three years, the first investment phase of the resources boom is approaching its peak, however, and the Reserve's interest rate policy is now squarely focused on kick-starting growth elsewhere.
Announced but not yet committed projects worth between $91 billion and $133 billion are also in the pipeline, and economists at BIS Shrapnel expect that mining production will grow at an average clip of 7.3 per cent a year through to 2016-17.
They say employment in the resources sector will grow from 250,000 to about 315,000 between now and 2016, predict that the value of mine maintenance work alone will rise by 22 per cent to $7.5 billion in the next five years, and expect contract mining income to rise by 20 per cent to $12.5 billion in the next three years.
The value of new resource project commitments in the six months to October was less than a third of what it was in the previous six months, however, and in the Australian Bureau of Statistics' last investment survey, investment ''intentions'' had been scaled back by 8.1 per cent: more project delays and cancellations are coming, as companies respond to weaker commodity prices and high development and operating costs.
Expansion spending in the sector will peak some time next year: and because mining investment has been an outsized contributor to the economy's growth in recent years, it will be an out-sized brake on growth as it falls from historic highs.
The Reserve needs the rest of the economy to take up the slack. It said on Tuesday that it had more room to move as inflationary pressure from the resources boom eased and it has already cut its cash rate by 1.75 percentage points to 3 per cent in little more than a year. If you were looking to find new sources of economic growth, you wouldn't be starting from here, though.
AMP economist Shane Oliver recently looked at economic indicators one year into previous rate-cutting cycles, in July 1997, February 2002 and September 2009, and they were much stronger than they are today.
NAB's survey of business confidence averaged a plus 16-point reading one year into those previous rate cut programs. It is currently at minus 1. Retail sales were growing at an annual average of plus 5.5 per cent a year into the previous cycles, and are growing by 3.1 per cent now, with the latest, flat monthly sales result in October raising the spectre of a consumer strike over Christmas.
The latest dwelling approval numbers for October were weak, but growth of 14.5 per cent in the latest year is acceptable. Auction clearance rates, however, are substantially lower, house prices are flat to falling instead of rising, employment growth is running at an annual rate of 0.6 per cent, compared with average growth of 6.8 per cent, and private sector credit growth is expanding at a rate of 3.8 per cent, against an average of 6.8 per cent.
The weakness in the non-resources sector isn't a result only of the relatively high rates that the Reserve maintained at the height of the boom in order to control inflation.
Foreign money that is pouring in to Commonwealth bonds and other fixed-interest paper here and keeping the Australian dollar high enough to makes exports and locally manufactured goods less price competitive isn't just chasing local interest rates: it is hiding from the global crisis, and will continue to do so even as rate cuts here make our currency marginally less attractive.
Fear of another market crisis that is propelling overseas money here is also alive in a less toxic form in this economy, and suppressing consumer demand and private sector investment outside the mining sector. The hunt on both sides of the political fence for fiscal surpluses also means that government support for the economy will be retreating next year, clipping 1 percentage point or more from growth.
The Reserve gave no guidance on future cuts yesterday, but it aims to push down bank lending rates. And because the banks have not been passing cash rates through completely, home loan mortgage rates and small overdraft rates are still almost 1 percentage point higher than were in 2009, when the cash rate was last at 3 per cent.
Fiscal settings were more supportive then, and the Australian dollar is about 30 per cent higher now. Two more cuts of a quarter of percentage point in the new year are highly likely.