Have no doubt, the Australian economy is now well positioned to continue its 16 year expansion well into its 17th and perhaps 18th successive year, unless we do something really stupid to blow it.
In its own, highly conservative way, the Reserve Bank has indicated there are no real barriers to the expansion continuing: only a wages break out financed or run by profligate companies, governments, or a surge in demand from an out of control Chinese economy, can wreck the expansion.
(The biggest unknown though is what happens if the Chinese economy continues to grow at breakneck pace, with domestic asset booms, over investment and despite more rises in interest rates and reserve deposit ratios? Financial chaos?).
In its second quarterly Monetary Policy Statement, issued on Friday, the RBA explained why interest rates didn’t move last week and laid out a fairly convincing case why there will be no need for a move for at least a year and possibly longer, if things don’t happen out of the blue.
Inflation has fallen faster than the RBA thought in February in its first statement for 2007, economic activity has picked up (as evidenced by stronger retail sales and a tentative rebound in some parts of housing), the terms of trade will decline this year, thanks in part to the stronger Australian dollar, and inflation in 2008 and 2009 is now seen as a bit lower than previously thought.
So all that speculation about interest rates will disappear for a while, although with March retail sales and building approvals out tomorrow (and will be overshadowed by the Federal Budget) and April Labour Force figures on Friday, it will be interesting to read the commentary from the analysts and others.
Normally stronger figures for any or all three sets of stats would be enough to bring the line ‘interest rate rise looms’ out of storage.
But with the RBA fairly firming shoving a rate rise off the agenda for sometime, there will be no mileage in adopting the chicken little approach to economic commentary (rate rise looms!).
These figures and especially retail sales, will be handy updates on how some key sectors in the domestic orientated part of the stockmarket are traveling: the retailers and the building supplies and homebuilders.
David Jones will release its third quarter sales on Wednesday and these will help fill out Tuesday’s ABS numbers in the department store sector.
For those really interested, comparing the outlook commentaries from federal treasurer in the budget papers, and the RBA’s MPS of last Friday will be instructive.
By issuing its statement ahead of the Budget the RBA has quietly asserted its policy dominance and revealed a forecast against which all other forecasts (from treasurer for example) will be compared.
And finally what now for the Australian dollar?
It pushed back over 82 USc on Friday night as the US dollar fell on that mixed economic news but it is now a fair way short of those 17 year highs reached in April of well over 83 USc (and closer to 84 USc).
Once the market had scanned and digested the RBA MPS on Friday the dollar was sold off by around half a cent or so on Friday afternoon and it fell well under 82 USc.
Much of the recent rise has been put down to carry trade investors borrowing cheaply in Japanese yen and investing in higher yielding markets like Australia and NZ. But that was also on the expectation that interest rates would rise.
The speculators hit paydirt in New Zealand 10 days ago when rates rose there but have now missed out three times here in just over a month: two successive RBA board meetings left rates alone and now the Bank in its MPS says no movement for sometime and makes very mild comments about the outlook (saying the risks to the economy from higher wages and firm demand and capacity constraints appear ‘evenly balanced’).
That will produce a gradual sell down in the Aussie unless the US currency continues to fall. The Fed won’t move on rates this week so some weakness in the greenback can be expected, but an 80 USc Aussie over the next month or so wouldn’t surprise.
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So what did the RBA say? Here’s the key part of Friday’s statement.
The data that have become available recently suggest there has been some easing in the trend in inflation, with consumer price inflation remaining low for the second quarter in a row and producer price inflation also easing in the March quarter.
The Bank’s forecasts assume that oil prices and the exchange rate remain around current levels through to the end of the forecast period (June quarter 2009), and that global growth slows modestly but remains above its long-run average rate, in line with Consensus forecasts.
The terms of trade are assumed to decline by around 7 per cent over the forecast period. In line with recent data that suggest a modest strengthening in activity, the outlook for growth in demand and activity has been revised up slightly, with non-farm GDP now expected to grow by around 3¼-3½ per cent per annum.
Domestic demand is expected to grow at a rate close to trend, while resource exports should increase more rapidly over the forecast period as the recent strength in mining investment has expanded capacity.
The drought will weigh on growth in the short term, but assuming a return to average seasonal conditions, the farm sector should add to growth thereafter.
The near-term inflation forecast has been revised downward slightly relative to the forecasts contained in the previous Statement, reflecting the recent lower outcomes for underlying inflation.
The central forecast is for year-ended underlying inflation – which was around 2¾ per cent over the year to the March quarter – to fall back to around or a little below 2½ per cent in the next few quarters.
Headline CPI inflation is still expected to fall to a little below 2 per cent i
