So the consensus is that the economy’s strength will push up interest rates at some time in the not too distant future, say October or November.
Well that’s wrong, it won’t be the performance of the economy that does it because it isn’t booming.
Growth of 0.6% in the June quarter and through the year to June 30 isn’t a boom.
It’s all due to the stimulus spending from Canberra and the record 4.25% cut in interest rates since late last year.
In a year’s time the economy might very well be stronger, as the Reserve Bank expects it to be, but the RBA has other matters on its interest rate check list.
But we are doing better than our major trading partners.
For example, the Organisation for Economic Co-Operation and Development overnight had some ‘good’ news: the slump is getting better and ‘recovery will be here a bit earlier than expected for the seven major economies (which excludes China). .
"The OECD forecasts economic growth across the Group of Seven countries to fall by 3.7% this year, a less brutal contraction than the 4.1% drop projected in June 2009.
"The latest GDP forecasts for this year provide slightly improved outlooks for Japan and the Euro area, an unchanged overall projection for the US but point to a gloomier situation in the UK."
But it then said: "Governments will need to continue to stimulate their economies as rising unemployment and weak housing markets continue to dampen private demand.
"The current exceptionally low interest rates should remain in force for the time being."
But in Australia we seem a little more advanced and are actively discussing rate rises, when none need happen as quickly as many ‘experts’ suggest.
In fact the Bank has already laid out the factors that will trigger a rate rise: it’s all about housing, bottlenecks and inflationary asset bubbles, not an economy growing at 0.6%.
But before then, there’s every likelihood that the economy will sag, perhaps for part of all of this quarter and towards the end of the year when some of the stimulus spending disappears, such as the tax boost for small business.
So it would pay to re-read Tuesday’s post board meeting statement to get a better handle on rates, rather read the tea leaves buried in the June quarter’s national accounts.
Here’s what the RBA Governor, Glenn Stevens said in Tuesday’s statement:
"Some spending has probably been brought forward by the various policy initiatives; in those areas demand may soften in the near term.
"Some types of capital spending are also likely to be held back for a while by financing constraints.
"But overall, it now appears that investment may not be as weak over the year ahead as earlier expected."
So with business investment stronger in the June quarter, thanks in part to tax breaks driving investment in plant and machinery by small and medium business, there’s a chance we could see a slowdown in this area this quarter, and perhaps into December.
Note that the Governor said investment may not be as weak over the year ahead as expected.
The AMP’s senior economist, Bob Cuneen picked up on that point in a note yesterday:
"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."
And then there was the Gov’s speech in Sydney in late July, which everyone is now forgetting after two board meetings and the national accounts.
They shouldn’t, because in that he made it quite clear where the RBA’s concerns lay:
"One thing this presumably means is that the prominence of household demand in driving the expansion from the mid 1990s to the mid 2000s should not be expected to recur in the next upswing.
"The rise in household leverage, the much lower rate of saving out of current income, and the rise in asset values we saw since the mid 1990s, are far more likely to have been features of a one-time adjustment, albeit a fairly drawn-out one, than of a permanent trend.
"Moreover the risks associated with those trends going too far are apparent from events in other countries. These risks have been reasonably contained so far in Australia – but it would be prudent not to push our luck here.
"A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices.
"Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling st
