TRANSCRIPTION OF FINANCE NEWS NETWORK INTERVIEW WITH BT FINANCIAL, CHIEF ECONOMIST, CHRIS CATON
Bianca Hartge: Thanks for joining us we’re speaking with Chris Caton Chief Economist at BT Financial. Chris what’s the current state of the Australian and global economies?
Chris Caton: It’s a good question. What is the current state of the Australian economy? I was telling my audience yesterday if they’re not confused then they don’t understand because it’s very strange. I actually think that the Australian economy is in recession but it’s a very strange recession. We haven’t had the two successive borders of negative GDP growth but we have had a rise in the unemployment rate of almost 2% and we’re not done with that yet and to me if the labour market has deteriorated that much you have to call that a recession. The recession in the early 90’s was characterized as a recession we had to have. This is the recession where we hardly had. You have to say that whether you call it a recession or not, the Australian economy is doing a lot better than we could even dare to have hoped for just six months but to me we’re bumping along the bottom. We’re close to zero growth. That will be the case for some time I think but there is no question about it, recovery around the corner, stronger growth next year, not least because the world economy has stabilized and that will help Australia next year so at the moment there is close to zero growth, maybe slightly positive, better times ahead but importantly we haven’t seen the peak in the unemployment rate yet.
Bianca Hartge: What’s the outlook for interest rates moving forward?
Chris Caton: The fact that inflation was high didn’t stop us from cutting rates and the fact that inflation is coming down within the band won’t stop us from raising rates. We’re about to do something we’ve never done before. We’re about to start raising interest rates before its clear the unemployment rate has peaked. We usually wait for that, so that’s like the ‘all clear’ signal but this time we won’t. Why? Well the Reserve Bank would say that ‘look, between September 2008 and April this year we cut rates quickly and a long way and we did that partly because we thought there was the significant risk of something very ugly happening to the Australian economy. Now we know that’s not going to happen we are entitled to take back the emergency part of that rate cut’ and you’ll notice that Glen Stevens the Governor has used that word ‘emergency’ a number of times so rates are going to rise not because there’s anything wrong with the Australian economy but simply because there’s something right, we don’t need emergency settings for interest rates. When we begin to raise rates the eventual rise almost always goes on for longer and finishes up higher than people expect so I think we’ll be raising rates possibly for a year but it’s got very little to do with the current outlook for inflation.
Bianca Hartge: So are we likely to see a rate rise before Christmas?
Chris Caton: Well the cash rate is now 3. I think it’s reasonable to expect it will be a percent higher by say June next year and possibly another percent higher by the end of next year. Once we start doing this provided only the economy keeps growing then rates will keep rising for quite some time yet.
Bianca Hartge: And what’s the outlook then for the Aussie Dollar?
Chris Caton: First of all you’re trying to forecast a currency that fell 40% in three months last year and has risen 35% or more in six months this year so it’s clearly very difficult. My estimate of fair value of the Australian Dollar which focuses hugely on what the US Dollar is doing, my estimate of fair value suggests we should be around 83 cents and as we speak we’re 86.5. Obviously currencies can overshoot. I think this one has. It’s always tempting to say well it’s going to go higher still but my suspicion is that somewhere out there we’ll consolidate somewhere in the low 80’s.
Bianca Hartge: Just finally, what are the key risks for investment markets moving forward into 2010?
Chris Caton: We tend to use risk in a negative sense but I think the development that’s still under-priced is strong growth. In a sense that’s the key risk that the world economy, not necessarily for the next five years, but for the next year surprise us by just how strongly it grows. So the risk I guess is that you’re not in and share markets continue to rise rapidly. If you interpret risk purely as a negative thing then I would have to concede that there’s some chance that the W-shaped story is correct and that economies do soften again but as I said on the balance of probabilities I think the risk of surprisingly strong growth is higher than the risk of surprisingly weak growth.
