Australia’s forceful loosening of monetary policy continued apace Tuesday with another bold cut in interest rates, this time of a full point, to bring the official cash rate to 4.25 per cent – the fourth cut by the Reserve Bank of Australia in just over three months.
The cut was exactly what was priced into the interest rate market, but more than the economic consensus, noted Richard Grace, chief currency strategist at CBA in Sydney. And by exceeding most economists’ expectations for a 75bp cut, the RBA is clearly signalling it thinks the economy is in worse shape than previously thought, writes Alan Kohler at Business Spectator.
Crikey’s Glenn Dyer, meanwhile, notes that the RBA has now undone all the tightening of the past six-plus years, bringing rates back to “where they were in December 2001 after starting in September with a cautious 0.25 per cent, then October’s surprise 1 per cent, November’s equally surprising 0.75 per cent and then Tuesday’s much forecast 1 per cent cut”.
And, says Dyer, given the speed of the collapse in global and local demand and output (in manufacturing, retailing and home building, plus what’s now happening in resources), “there’s every chance rates could go lower — well under 4 per cent and stay there for some time”.
The real driver, however, in the view of Dyer and other commentators, was the “sickening fall” in manufacturing in Australia, China, the US and elsewhere in the world last month.
Above all, the fall in China “will send a message that that country’s economic growth surge is slowing rapidly”, with industrial production seemingly weakening quickly as a housing slump bites.
The RBA had been looking for solid demand from China to offset domestic sluggishness next year: but China’s November survey of purchasing managers issued this week was “ugly, very ugly”, says Stephen Wyatt, China-based commodities commentator for the Australian Financial Review.
The record contraction in China’s manufacturing points to a severe downturn in industrial production over the next 6-12 months and consequently weaker demand for industrial commodities, like steel, iron ore, coal and copper, notes Wyatt. Worse, European and US manufacturing is also expected to weaken further over the coming months:
Economists expect US and European PMIs to point to very weak industrial production – probably weaker than China’s – with indices slumping back to 2001 levels.
2001 was when this current global resources boom began. That was when copper was at 70 cents a pound, crude oil at $25 a barrel and BHP Billiton at A$10 a share.
And China’s PMI release follows the fall in Japanese manufacturing activity in November for the ninth straight month in yet another sign that the Japanese economy, Australia’s biggest export market, is taking yet another blow from the global downturn.
Together, these PMIs paint a bleak picture for commodities and resource equities over the coming six months at least. Such forward looking economic numbers are consistent with anaecdotal evidence in China, with its export and construction sectors in sharp contraction, unemployment rising and bankrupcies accelerating.
The latest PMI figures are also consistent with the 60 per cent plus falls in commodity prices so far, notes Wyatt. But they are not consistent with the recent 25-50 per cent price surge in Australian resource stocks.
“Such numbers indicate that rallies like these are rallies in bear markets; that as Australian miners confront an ongoing economic storm their share prices will fall again and retest recent lows”, he concludes. And, these forward indicators point to the fact that the cycle lows are still a way off.
So, then, while the RBA didn’t mention the “R” word on Tuesday, it left a much stronger impression from its Tuesday statement that Australian demand and output have fallen a lot faster than expected, especially in the last two months, says Dyer. Furthermore, the global recession won’t be easing any time soon and Australia will continue to be affected.
The RBA pointed out that while Australia’s economy has been “more resilient than other advanced economies”, recent figures “suggested that a significant moderation of demand and activity has been occurring.” The statement went on:
With confidence affected by the financial turbulence and a decline in the terms of trade now under way, more cautious behaviour by both households and businesses is likely to see private demand remain subdued in the near term.
With that outlook, and with capacity pressures now easing, it is likely that inflation in Australia will soon start to fall. Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of inflation to the target could take longer than would otherwise have been the case.
Together with the spending measures announced by the government, and a large fall in the Australian dollar exchange rate, significant policy stimulus will be supporting demand over the year ahead.
Recent actions by governments and central banks to stabilise their respective financial systems have begun to take effect. Nonetheless, financial market sentiment remains fragile, as evidence accumulates of weak economic conditions in the major countries and a significant slowing in many emerging countries. Commodity prices have fallen further. This, combined with the likelihood of below-trend growth in the global economy, suggests that global inflation will moderate significantly in 2009.
On a slightly more optimistic note, CBA’s Richard Grace concludes that the implication from the RBA is that the large reduction in interest rates, the government’s 1 per cent fiscal package, and the large 35 per cent depreciation in the exchange rate will work its way through the economy – “hence their appears little need to have a meeting in January (traditionally not scheduled)”.
The Australian dollar should hold onto some of its gains as the RBA maintains its pro-active policy settings, but the medium-term trend remains for a lower Aussie, says Grace, who estimates that Q3 real GDP figures due Wednesday will show a slight uptick of just 0.2 per cent – which is really not bad in these troubled times.
But Macquarie Bank interest rate strategist, Rory Robertson (who forecast a 1 per cent cut), believes the RBA could continue cutting to well under 4 per cent, perhaps as low as 3 per cent next year and stay there “for a prolonged period”, adds Crikey’s Dyer.
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