So what does the growth figure mean for the further direction of interest rates?
The AMP’s Senior Economist, Bob Cuneen says rates won’t rise this year, Macquarie’s interest rate strategist, Rory Robertson reckons they will, with next month back in the forefront for the first rate rise.
Mr Cuneen explained his belief that rates won’t go up in 2009:
Australia’s economy has managed to expand by +0.6% in the second quarter of 2009.
This is a remarkable result that indicates the Australian economy has avoided a technical recession (two consecutive quarters of declining GDP) despite the global financial crisis.
Australia has recorded only one quarter where Real GDP has declined (the final quarter of 2008 recorded a fall of -0.7% qoq).
Compared to the deep recessions in America, Europe and Japan over the past year, Australia has sailed through the global financial storm given the benefit of assertive & timely policy stimulus in late 2008 as well as the corporate & consumer resilience.
For the second quarter’s Real GDP result, the source of strength was primarily consumer spending (+0.5% qoq) and machinery investment (+5.6% qoq).
Household consumption proved solid given the benefit of lower mortgage interest rates and fiscal stimulus, while machinery equipment was aided by the government’s timely investment incentives.
As Australia has endured only a shallow & short downturn according to the GDP data, there is considerable debate whether the RBA will now rapidly move away from "emergency" interest rates setting and raise the cash rate this year.
Clearly the case for higher rates is assisted by the recent revival in asset prices (house & share prices) and the encouraging signs from the global economy that "green shoots" are now emerging from the dust in terms of rising business & consumer sentiment.
However Australia still faces some headwinds for the remainder of 2009.
As the RBA Governor noted in yesterday policy statement , there may be some softening in Australian demand in the near term given that "some spending has been brought forward by the various policy initiatives" and there are "financing constraints" for capital spending.
Notably Australian business lending growth is still contracting (July saw a monthly fall of -0.3% and – 0.7% for the year) suggesting that the corporate sector is still wary and prefers to repair its balance sheet rather than fully commit to long term investment.
Indeed a composite measure of Australia’s leading indicators suggests that the Australian economy is still vulnerable to recording a transitory negative quarter of GDP activity in the September quarter before sustaining solid + 2 % real growth in 2010.
Given these counterbalancing forces, the RBA is more likely to stand aside in coming months awaiting confirmation that both the Australian and global economy are on a sustained recovery path.
Accordingly, Australia’s cash rate should be held at 3.0% until year end before rising rapidly towards a more normal 5 % in 2010.
Macquarie’s Rory Robertson though takes another tack:
- GDP rose by 0.6% in Q2 after rising by 0.4% (unrevised) in Q1. Importantly, non-farm GDP is estimated to have grown by a strong 1.1% in Q2 after a 0.5% increase in Q1 (see chart).
- That is, the Australian economy grew by 1% over the first half of the year, confounding many turn-of-the-year forecasts that it would shrink. Consumption grew solidly (up by 0.8%) in Q2, while exports and business investment both rose rather than fell, as was already known.
- Those highlighting the damage to nominal GDP, company profits and the “terms of trade” from lower contract prices in Q2 for coal and iron-ore should also note that most prices in global commodity markets have risen strongly over the past six months.
- Yes, today’s result is “history”. After all, we’re already two-thirds of the way through Q3. But 1% real GDP growth over the first half of 2009 is brand-new history that the RBA if it chooses can use to further its argument that the “economic emergency” that prompted its extraordinarily-low 3% cash rate has passed, and so the time has come to tighten somewhat its loosest-ever setting of policy.
- Accordingly, the 6 October Board meeting is “live” with potential for the RBA’s first hike. As argued here before, last week’s much-brighter news on business investment – alongside this week’s strong increase in house prices in June and July – suggests that something bad now needs to happen to stop the RBA from fast-tracking its first hike to October.
- Things that would work to postpone any October hike include: an extremely weak US jobs report on Friday (actually, -400k is more likely than -200k), something particularly weak from Australia’s jobs report next Thursday, back-to-back falls in local retail sales in July and August (on 9 and 30 September), another round of mortgage-rate “top ups” by our major lenders, and/or – most obviously – any returns to serious weakness in global equity, credit and commodity markets – we’ve seen a hint of that in recent days – via (say weaker) news out of China.
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