The Reserve Bank board meets today and is not expected to cut interest rates, despite claims by some commentators that the economy is approaching "stall speed" to quote a commentary yesterday by brokers Goldman Sachs JBWere.
Yesterday’s house price index figures for the June quarter and 2007-08 show that house prices are on the whole slowing, but there is still a bit of strength in parts of Sydney, Brisbane and Adelaide and particular.
The most interesting figure was the big drop in the quarter in Perth which nicely rebuts all those claims from some who claim there is a two speed economy in this country with resource-rich Queensland and Western Australia doing a lot better than slower NSW and Victoria.
Perth had the biggest fall of the major cities in the index: down 2.4% in the three months, while last week’s retail sales figures show a sharp fall in the west, compared to more moderate declines in sales elsewhere.
Goldman Sachs JBWere said in a preview yesterday that it didn’t see "a precipitous fall" in house prices as being likely because "longer-run supply-demand fundamentals remain generally supportive" of solid prices.
But based on last week’s flow of poor news for the economy Goldman Sachs’ economists now viewed the economy as approaching "stall speed” with a rate cut to happen by the end of the year.
"We have now formally changed our interest rate forecasts. Over the past 12 months our forecasts have called for the commencement of the RBA rate cutting phase to occur in 2Q09 with 75bp of cuts by end-09. We now expect the RBA to commence cutting rates in November 2008 and expect 100bp of easing by end-09.
"A debilitating mixture of household and financial sector deleveraging resulting in sharply slowing credit growth, record real oil prices, contractionary fiscal settings and the tightest level of financial conditions since the early 1990s recession have coagulated into a recessed retail environment and a slump in confidence which is now visiting levels only witnessed during recession periods.
"With the employment market likely to weaken materially over the 2H08 the RBA will need to address the crisis of confidence to avoid a more pernicious outcome for the economy.
"The economy is still likely to skirt around a technical recession, thanks in part to an anticipated recovery in farm production, but the pace of deceleration has likely unnerved the RBA and the risk of a hard landing remains high (approx 40%).
"The economy already appears to be operating at close to stall speed."
Macquarie Bank interest rate strategist, Rory Robertson said in a commentary after the release of the house price index figures and the monthly ANZ job ads series that "It now is obvious to all almost everyone that extremely tight financial conditions are bringing the Australian economy to a screeching halt.”
He wrote yesterday: “Today’s latest weak ANZ job-ads reading adds weight to the story that the RBA is likely to cut its cash rate from 7.25% in the next couple of months."
"ANZ newspaper job ads fell by a further 5% in July, to be down by one-quarter since December.
"Importantly, the developing weakness in labour demand – likely to become clearer in the official jobs data over coming months – is most apparent in the former-boom state of Queensland (job ads down by almost one-third), with its resource-rich sister-state Western Australia not far behind (job ads down by about one-quarter).
"As I wrote on Friday, an RBA rate cut this week cannot be ruled out. If nothing happens – beyond the RBA publishing a dovish post-meeting statement – a 50bp rate cut in September will seem increasingly likely"
For the first time in three years, Australian house prices have started falling officially, according to the Australian Bureau of Statistics: the fall is not uniform, according to its latest home price index for the June quarter, but it is gathering pace.
Booming Perth and Melbourne saw falls, but there was a surprise small rise in Sydney (which is supposed to be suffering big falls across most suburbs) while Queensland house prices and those in Darwin and Adelaide again rose.
And it is quite likely the drop will become more pronounced as revisions happen in earlier months: already the sharp 1.1% rise in the March quarter, compared to the December quarter, has been slashed (as many economists suggested it might) to a rise of 0.4%.
It’s now clear that house prices have been easing since the start of the year, and possibly beyond.
That restated 0.4% rise in the March quarter and the 0.3% fall in the June quarter, compared to March, left the Index 8.2% higher in the year to June, according to the initial estimate of a 13.8% rise in the year to March.
That March year rise was cut to 13.2% by the ABS, which according to some economists is still too high.
The ABS said that “Preliminary estimates show the price index for established houses for the weighted average of the eight capital cities decreased –0.3% in the June quarter 2008."
That was much less, around a third under the 1% drop expected by the market and most economists.
Private price surveys have suggested that prices in most capital city markets are falling, but that’s not how the ABS reported it (the Index is for a quarter, not the latest month)
"The capital city indexes rose in Darwin (+1.9%), Brisbane (+0.6%), Adelaide (+0.4%) and Sydney (+0.3%), and fell in Perth
