It is rare for the official cash rate to be cut four times in a year, and Treasurer Wayne Swan could not hide his elation at the Reserve Bank of Australia's decision to cut the official cash rate by 25 percentage points to 3 per cent on Tuesday. The last time interest rates were this low was in April 2009, when the global financial crisis was at its height. The Rudd government's quick response to the crisis (aided and abetted by China's continued strong demand for mineral commodities) allowed Australia to escape the worst of the global economic downturn. However, the effects of that stimulus spending have long since dissipated, and the economy is starting to look more vulnerable and exposed than at any time in the past two years.
With consumer spending in the doldrums, and with businesses large and small struggling to survive in the toughest trading conditions since 2009, Mr Swan will be hoping yesterday's rate cut provides the stimulus the economy needs to rebound in the new year. The timing - just three weeks from Christmas - will add to the government's delight. But, a range of economic data released this week will surely temper that joy.
The most concerning of these show company profits have shrunk to their lowest level since 2008. That decline, allied with a decline in wages that first became apparent in September 2009 and has yet to be reversed, is likely to result in lower than expected government revenues. That will almost certainly torpedo the Treasurer's hopes of returning the budget to surplus next year.
In recent months, Mr Swan has distanced himself from previous guarantees to post a surplus in next May's budget. It was a promise that was always more about political credibility than economic necessity, and the opposition is certain to make mischief if the Treasurer fails to deliver. Mr Swan's argument that a rate cut reflects the government's sound budget management and not any underlying economic weakness is also likely to be strongly contested by his opposite number, Joe Hockey.
The official statement accompanying yesterday's rate cut by Reserve Bank governor Glenn Stevens refers to ''growth … running close to trend over the past year, led by very large increases in capital spending in the resources sector'' but it also refers to other sectors having experienced ''weaker conditions''. While Mr Stevens expects private consumption spending to grow, he suggests ''a return to the very strong growth of some years ago is unlikely''.
In other words, the Rudd government's stimulus package was a very effective counter to economic contraction caused by the global credit crunch, but similar pump-priming measures cannot reasonably be expected again in the near future. Nor, according to Mr Stevens, can much in the way of economic salvation be expected from our major trading partners - China, Japan and South Korea - with ''key commodity prices … significantly lower than earlier in the year''.
The exchange rate also remains a concern for the bank and with good reason. A high dollar has helped keep the price of fuel and consumer durables down, and kept underlying inflation in check but it has had a devastating effect on Australia's export competitiveness. It has contributed to the hollowing out of Australia's manufacturing sector and indirectly cost thousands of workers their jobs. Attempts by the Reserve Bank to drive the exchange rate down have been stymied, in part by the recent decision of the Russian and Swiss central banks to increase their holdings of Australian dollars , and most economists see little prospect of it slipping below parity with the US dollar anytime soon.
Australia's unemployment rate remained unchanged at 5.4 per cent in October but falling company profits and corporate closures occasioned by the strong dollar have inevitably stoked fears that the jobless rate will begin rising again.
There is some cause for optimism, according to Mr Stevens: the US economy is recording moderate growth, and growth in China has stabilised. Indeed, reports this week suggest China's growth rate is set to begin accelerating again this quarter after seven quarters of slowing growth. Importantly, the Reserve Bank regards underlying inflation as within its medium-range target, suggesting it has the capability to ease monetary policy further if the situation warrants it.
Mr Swan can take some solace from that fact. But he and the government can expect to feel some heat from the opposition (and voters) if key economic indicators continue to flatline in the new year.