Australia's still on a good wicket... for now

by David Taylor

There is no doubt that Australia’s economy is among the best in the world. Unemployment is relatively low, inflation is – for now – contained, and we have a very competitive GDP (or national income). Much of this can be put down to China. As the saying goes, Australia used to ride on the back of a sheep, now we ride on the back of a dump truck. Put simply, China is industrialising and Australia produces the raw materials China needs to achieve that end. So what else does Australia have? Is that it? And do we just look good because the rest of the world looks so bad? How does it all affect you and me? … all good questions. Let’s answer them.

This week saw the release of Australia’s official employment data. It was surprisingly robust. Over 40,000 new jobs were created last month. More people were out there actively seeking work, however (labour force rose), so the unemployment rate remained steady at 5.2 per cent. Interestingly, quite a few jobs were created in the non-mining states of the country like New South Wales and Victoria. It’s consistent with the ANZ job advertisements data we saw recently (showing employers were looking to hire more staff), and the small rise in business confidence recorded last month.

So how does that affect you and me? As far as interest rates are concerned, for those on a tight budget looking for some financial relief, the unemployment figures do nothing to boost the case for a 0.25 per cent interest rate cut in May. At least that’s the view of currency traders who sent the dollar higher immediately following the news. Their logic is that a stronger-than-expected employment read translates into more demand throughout the economy. That means a Reserve Bank focused on inflation is unlikely to stimulate demand further through dropping interest rates (all putting upwards pressure on inflation). If there’s less of a chance of interest rates moving lower, then the rates of return gained from having money in Australian term deposits remain relatively attractive. That encourages investors to buy Aussie dollars (so they can put their money into Australian bank accounts) - hence the appreciation of the currency.

Clearly, despite weakness in Australia’s manufacturing, tourism and retail sectors, China’s demand for our raw materials is providing a semi-solid base for the economy, and continues to help elevate the currency. We’ve just had to take the good with the bad and that means many Australians on the wrong side of the growth equation remain under pressure – including those looking for interest rate relief.

But is it all about to sour? Last Friday China released its first quarter GDP figures. The numbers were weaker than expected. Specifically, if you look at the year on year result, China’s economy is growing at 8.1 per cent. That’s down from 8.9 per cent in the previous quarter. The government has indeed actively sought to slow the economy to avoid it over-heating. The question is: Will it be able to stop it from slowing too far or too quickly? The jury could be out on that one. Australian economists say any growth rate above 7.5 per cent is good news for our economy. Anything south of that raises alarm bells. Paul Bloxham is the chief economist of HSBC Australia. I spoke to him yesterday and he conceded this latest reading on Chinese national income put the economy in the danger zone. He said he hoped this was the “low point” in China’s growth story. Some economists do, however, remain optimistic. A senior Chinese economist with the ANZ Bank, for instance, argues that China’s economic growth is almost certain to pick up from here.

The major concern for China, and indeed other major economies like the United States, is Europe. One of the reasons cited by the World Bank for China’s slowdown was the European debt crisis. In fact the threat from Europe is so real Chinese policy makers are actively trying to shift China’s main source of income from being led by international trade, to being led by domestic consumption. The reality of course is that the European economic crisis is showing few signs of getting better. Even the European Central Bank came out last week and warned the region that it alone could not solve the region’s financial problems and was calling on individual governments to do more to get their houses in order. Money markets within Europe are also skittish. Bond yields (a measure of how risky investors perceive debt to be) rose in both Spain and Italy last week. Despite all the rescue attempts, it seems investors are not convinced the worst is over. In fact there’s now talk Spain and Italy will be next in line, after Greece, for a financial bailout.

So it’s clear, if China really can stabilise its economy from here, Australia looks well placed for the near to medium term. But that’s as far as we can honestly forecast for now. There are too many risks, and too many unknowns to go beyond that. It may explain why so many investors are still in cash. That’s also had the side-effect of creating competition among the banks to attract their fair share of depositors. It resulted in the ANZ actually lifting the rates on its standard variable mortgages last Friday by 0.06 per cent (6 basis points). It puts a whole different spin on next month’s Reserve Bank interest rates decision. Economists and business representatives are currently lobbying the central bank to cut interest rates by 0.25 per cent. But the banks themselves are now not only moving independently of the RBA but at least one (and potentially more this week) is now also going in the opposite direction.

Extraordinary isn’t it? Nearly 4 years on, and the waves and ripple effects of the global financial crisis are still making their way around the world.

David Taylor


The content in my blog is non advisory, please do not interpret this as advice in any way shape or form. These are just my thoughts and nothing I say should be acted upon.

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