While Australia’s economy slowed in the December quarter, it won’t be enough to satisfy the gloomy folk at the Reserve Bank or change their thinking on interest rates.
But the news, plus signs of a further easing in activity in January, could very well be enough to keep the RBA on the sidelines for most of this year after yesterday’s rise.
But some economists disagree, saying the slowdown in growth was because of the larger than expected drain caused by the huge balance of payments deficit.
Without that, domestic demand was still strong and that will keep the RBA unhappy and very watchful.
Domestic final demand grew 1.6% in the quarter and was 5.7% higher over the year, in seasonally adjusted terms. That’s the figure the RBA will be looking at with suspicion because that’s why the inflationary and capacity problems are showing up. The annual rate was 5.3% in the September quarter.
The ABS said that in seasonally adjusted terms, the main contributors to the increase in expenditure on GDP were “Household final consumption expenditure (0.9%) and New machinery and equipment (0.3%). The largest negative contribution came from Imports of goods and services (-0.8%)".
Gross national spending or GNE rose 1.5% in the quarter and was up 6.2% over the year, another sign of just how strong the economy was for most of the year and why the RBA was right to get worried about inflation and lift rates in successive months.
That’s spending and because much of the growth was driven by consumption in the final quarter, these figures would have justified a rise of 0.50% at the RBA’s February meeting, although the softening in retail sales in January would have caused second thoughts.
The ABS said that in seasonally adjusted terms, Mining, Manufacturing, Retail, Communication Services and Finance and Insurance all contributed 0.1% to GDP growth, while Construction and Property and Business Services both detracted 0.1% from GDP growth.
Already rate rises flowing from Tuesday’s lift are starting to appear:
Adelaide Bank, which merged with Bendigo Bank Ltd, has increased the cost of wholesale funds it supplies to mortgage brokers and originators by 0.40%, 0.15% above the RBA rise.
The increase does not apply to either Bendigo or Adelaide Bank’s retail home loans, but gives us a sign of what’s to come.
But that sector is shrinking with the news yesterday that Macquarie Bank is getting out of the business of mortgage ending and funding on Friday because of the rising cost of money and collapse of the securitisation market.
That will cut demand and supply of non-bank home loans.
The Australian Bureau of Statistics said that the country’s real gross domestic product (GDP) rose by a seasonally adjusted 0.6% in the December quarter, compared to an upwardly revised rise of 1.1% (1.0% originally) in the September quarter.
Driving the growth was continued strong consumption by households, even if retail sales growth was trimmed in the final two months by the ABS yesterday. That is what the RBA was worried about.
But it’s the slowest quarterly growth rate for the year, but GDP still rose a strong 3.9% over the 12 months, still probably too strong for the RBA’s liking.
Economists say the huge current account drain, caused in part by the inability to ship as much coal, iron ore and other resources into world markets, and slower construction activity were factors in the slower growth.
The outcome matches forecasts from market economists for a rise of 0.6% in the December quarter and an annual rate of 3.7%.
It also fits well with the comments yesterday from RBA Governor, Glenn Stevens when he said in his statement there is "tentative evidence that some moderation in household demand is beginning to occur. Overall tightening in financial conditions since 2007 is substantial.”
Against these national account figures, the official rate rises and top ups expected from major banks, the RBA will now be encouraged not to do anything for some months, even if the CPI figures for March on April 23 are again well above that the central bank would find acceptable.
Inflation is the bank’s main worry and the national accounts show that the chain price index, a measure of retail prices in the economy, rose 0.6% in the fourth quarter from September, to be 2.8% over the year, uncomfortably close to the RBA’s target. This measure is different to the CPI.
Household final consumption expenditure rose 1.6% the quarter (1.2% in September) and was up 5.0% over the year to December, seasonally adjusted.
Total investment in dwellings increased 2.1% in the quarter, to be up 1.6% in the year to December as it was boosted by investment in flats and units.
Total gross fixed capital formation rose 1.4% in the quarter and was up 8.2% over the year, adjusted as the resources and infrastructure investment booms rolled on. But that also represented a slowdown from the 10% annual growth rates in the year to September.
While some economists dismissed the trade figures, others said they were helpful in relieving the pressures on domestic capacity, especially for plant and machinery.
But even then they said the high current account deficit was still a sign of the high level of domestic demand sucking in imports.
The surge in imports is helping to relieve some of that domestic demand pressure, but it’s an indication that demand is still pushing on the capacity of the economy.
The question now is whether domestic activity will start (or when it will start) demand slowing in response to the 1% rise in official rates since last August, and the extra 0.20% to 0.40% coming from the banks in housing, personal credit, margin loans and more for business.
RBA assistant governor Dr Malcolm Edey said yesterday in a speech that ”dampening forces” are at work in the ec
