The economy is the $64 question this year, as it became last year after the smoke cleared from the huge resources/commodities rally in the five months to May, the pause, and then the drive upwards in oil spurred on by the Israel-Hezbollah fighting, North Korea and Iran tensions from July through to early September.
And while the economy remains the big question, inflation and interest rates are the focus of everyone.
Big question or not the economy is still showing signs that it will need an even bigger stick to slow it down until inflation is sedated.
Falling banana prices won’t do it all on their own.
In fact there’s probably even money chance on a rate rise at the February meeting of the Reserve Bank Board in around three weeks.
That was after the solid retail sales figures for November and the very good employment numbers for December.
But February could end up being an informationgathering meetingafter Christmas and the New Year by the Bank and the big decision-making month willbe March.
But another high inflation figure (the CPI is due on January 24 with the Producer Price Index due on January 22) might see a rate rise made all but inevitable for either board meeting.
Some economists are more sanguine than others: some see a rebound of sorts late in the year, others see another miserable year for the south eastern part of Australia while the mining boom starts going stale in WA and Queensland.
The country’s biggest bank, the NAB has issued its outlook for the year and believes that GDP growth will remains sub par (the NAB sees it at 2.25 per cent, unemployment rises a bit, Inflation risks ease (but remain a bit ‘sticky’) and the RBA remains on hold.
Here’s the NAB’s ‘base case’ for the national economy this year with a short explanation for each factor.
· Another sub-par year: 2007 GDP growth at 2¼% after 2½% in 2006 – mainly due to drought, sluggish household spending & high but lower business investment.
· Inflation pressures ease: Underling CPI up to 3¼% in near term then returns to middle of RBA’s target of 2-3% during 2007.
· RBA on hold and on the tight side: Cash rate stays at 6¼% during 2007, after RBA pushed up rates ¾ of a percentage point during 2006.
· 10 year bonds drift lower – as global inflation eases.
· $A eventually lower: $A/USD at 0.72 by mid 2007. Lower global commodity prices and peak in interest rates weigh a bit on $A
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GROWTH SIGNALS:
· Summer & winter rains – “assumed” return to normal seasonal conditions.
· Household financial position consolidates – savings rise, growth in credit & spending moderates. Top-end cools.
· Capacity pressures ease – job gains slow, rise in jobless & fall in capacity utilisation.
· Housing approvals sideways – full effects of recent rate hikes dampen demand, despite fundamental undersupply.
· Commodity prices decline – energy & base metal prices fall.
· State trends less divergent – activity in resource rich regions states moderates, western Sydney stays subdued, WA residential property market cools.
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GROWTH RISKS:
· Upside: World growth stays very strong as emerging BRICs take up slack in G3; wealth effects of strong share markets; overly expansionary May (election) Budget.
· Downside: US “hard landing” spills over into China; geopolitics sends oil prices up & growth down; disorderly unwinding of global imbalances; drought extends into 2007.
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GROWTH FUNDAMENTALS:
· Easing global growth & flat to lower commodity prices – external stimulus fades.
· Households, on average, constrained by increased gearing & higher interest rates – private consumption growth remains below average & dwelling investment remains subdued. Modest house price gains, overall.
· Business investment peaks – mining/commodity investment boom subsides and, more generally, slower demand and profits growth hit others.
· Modest export recovery – resource exports pick up, but drought hits rural exports and non-commodity exports still being hurt by lost competitiveness.
· Severe drought – nominal farm incomes cut by about $6bn in 2006/07 and, allowing for multiplier effects, lower real economy-wide GDP by 0.75-1.0%.
INFALTION FUNDAMENTALS:
· Demand pressures ease – output gap widens a bit & capacity constraints ease.
· Small drought effect on headline – prices of fruit & veg, dairy & cereals up, meat down.
· Aggregate wage pressures ease – pressures contained to mining & construction.
· Productivity improves – end to labour hoarding as slower demand sustained.
· Global inflationary pressures ease – lower oil & other commodity prices, slowdown in growth, partly offset by lower $A.
INTEREST RATE FUNDAMENTALS AND RISKS:
· Cash rate peaks – medium-term inflation risks ease due to sustained slower domestic demand with non-farm GDP below trend & rising unemployment.
· Near term inflation – RBA responds in February to higher than expected underlying CPI for Q4 2006 & raises cash once more.
· RBA ends tight policy – rate cuts most likely in late 2007/2008.
· $A eventually lower -resource prices fall & interest rate carry trade less attractive.
