While America’s starting to fear deflation and its horrible consequences, no such fears are being expressed here.
Our inflation rate remains persistently high.
I suppose it’s one of the ‘good’ things of having a persistently hard to shake inflation problem that won’t resolve itself until late next year at the earliest, or into 2010 when it comes back close to the 3% top of the Reserve Bank’s range.
But that will still be a lot higher than what we will see in the US next year.
In fact those growing fears about deflation as expressed in the Fed’s latest minutes, are vivid: "Indeed, some saw a risk that over time inflation could fall below levels consistent with the Federal Reserve’s dual objectives of price stability and maximum employment".
It’s going to be a fear we will hear more and more of from the US, and other countries in Europe and Japan, especially in the middle months of 2009 when the falls in inflation will look huge when compared to the peak months of this year.
After 5% in the September quarter (and an average 4.7% for the RBA’s version), we are expecting another similar outcome of 4.5% to 5.0% annual for this quarter, then a gradual but steady fall in 2009.
In the US, headline consumer inflation is now running at an annual 3.7% for the year to October after the 1% fall in headline inflation.
The core rate was down 0.1%, and then there were the comments in the Fed’s minutes about the rising possibility of deflation next year.
It’s a timely reminder of the still significant differences between Australia and the US, for all the concerns were are facing here in the coming year.
Not only did we see the large fall in inflation in America, but also a slump in new home starts (to a new low) and the lowest level of permits for new homes ever issued.
That means housing will still be the main driver of the US slump in the early months of 2009.
The credit freeze and recession has eliminated any hope that an outbreak of home buying will start moping up the overhang of unsold new and existing houses.
That means further downward pressure on US house prices.
According to the Fed’s minutes, its outlook for 2009 sees the US economy growing in the range from -0.2% to 1% in 2009, after growth of 0% to 0.3% for this year.
In fact the Fed now believes that the US economy will fall in the first six months of next year, after a contraction in the September and December quarters.
"The staff expected that real GDP would continue to contract somewhat in the first half of 2009 and then rise in the second half, with the result that real GDP would be about unchanged for the year.
"In 2010, real GDP growth was expected to pick up to near the rate of potential growth, as the restraints on household and business spending from the financial market tensions were anticipated to begin to ease and the contraction in the housing market to come to an end.
"With growth below its potential rate for an extended period, the unemployment rate was expected to rise significantly through early 2010."
In fact the low range forecasts show Fed staff forecasting no growth whatsoever in 2009, with a recession from January through to December.
Compare that with Australia where growth is slowing. that’s not being denied by anyone, now.
Australian non-farm growth (the RBA forecast) is 1% through most of the year at the moment. Factor the farm in and it will rise to perhaps 1.5% (the US forecasts include farm output).
There are similarities with America: our new housing is recessed, but America’s is depressed by a number of factors greater than the pace of activity here.
We are yet to record the lowest level of building approvals (permits in the US) or see new home starts at an all time low, as the US did in October.
The US Commerce Department said that US housing starts reached an annual rate of 791,000 last month, the lowest level since the department began tracking starts in 1959.
The rate fell 4.5% from the revised reading of 828,000 in September.
Building permits fell 12% to an annual rate of 708,000 in October, breaking the previous low of 709,000 in March 1975. The annual rate for September was revised to 805,000.
US initial jobless figures hit a new record last week of 542,000, the highest figure for 26 years; manufacturing around Philadelphia fell to an 18 year low.
While our retail sales are static to trending lower, America’s are in free fall and the graphline is pointing downwards, almost vertically: ours is roughly horizontal.
Figures out last Friday showed that US retail sales fell by a record 2.8% in October (down 2.2% if cars and petrol are excluded), and coupled with the miserable news on new home starts and permits, overall consumer spending this quarter and in the March quarter of 2009 will be negative.
In fact US retailers are resigned to the worst Christmas season in decades with sales expected to be lower, even for food. At least ours are still hoping for some small growth, perhaps break even.
But the Fed’s minutes heard a much gloomier set of forecasts for this year and next, with the startling prediction that US unemployment will rise "significantly through 2010".
Seeing almost 1.2 million US jobs have been lost so far this year, with half of those coming in the three months to October and pushing the rate to 6.5%, the highest for a decade, the Fed’s forecasts are dramatic.
A "significant’ increase in US unemployment is a major statement
