RBA Rate decision – April 2013

The Reserve Bank of Australia has left interest rates on hold as widely expected at its board meeting today.  It continues to sit on the fence to consider further economic data following its series of cuts last year, plus the developing story of the new Euro crisis – Cyprus.  Then there’s China, which I come to later….

On the domestic home front, the economy is starting to show signs of improvement outside of the mining sector as its capital expenditure starts to slow. This slowing was the big fear of most economists as it flows through to GPD figures, dampening the economy which in their view is struggling to have other sectors pick up the slack.

However recent sentiment data has surprised most economists with its positive swing, which is reflective of a mood swing of the population that is starting to feel as if their local worlds are not as bad as being presented in the media and through politics.  In support of this we are seeing the low cash rate of the day finally providing an upswing in housing activity, albeit from a low base, this activity is a ‘confidence’ stamp for people believing in their job security and their willingness to move forward with their lives.

Housing is a critical economic driver as one dollar spent in this area has a significant flow on effect to the broader economy; as the Services sectors involved e.g. Conveyancers, Mortgage Brokers, Real Estate agents; the Construction sector e.g. Tradies, Builders, Town Planners, Civil Workers; the Retail sector e.g. home maker centre staff, the manufacturers of furniture etc.  The benefits carry through to GDP in many multiples.  However as we saw from the US, getting the broader balance right on creating demand and overshooting it to a point of developing a bubble is something the RBA is very conscious of when they set monetary policy. So they will be watching this sector with interest regarding home values, with such low interest rates compared to historical levels.

Some economist are tipping the next rate move just might be up! And I personally can see some logic in this argument if the ‘real’ non-mining economy does start to gather some serious pace and we see inflation start to edge up, but if it does eventuate I don’t see this happening this side of Christmas as this stage, as we also need to consider the other two concerning influences outside of Australia – Cyprus and China.

It’s amazing how the global mood on the economy can shift so quickly.  The last couple of months have seen the benefits of what a stable finance system can deliver in terms of stability and equity markets. Well, that was last month.  Now we face the developing financial issue of a Euro Zone member whose banking system is shot in Cyprus.  In isolation the Cyprus situation means little, and I’ve made plenty of comments before on my views on the Euro and the way it’s critical for Germany and France in keeping them globally competitive, of which you can read in my previous articles. However the decision to freeze money and manipulate the banking sector has far wider issues regarding one thing the Germans and the Frenchs will not be able to withstand is if it acted upon on a broad scale.  What I’m talking about is a run of EU banks as not only the wealthy, but everyday citizen’s seek to clear their funds from countries that carry risk.

Such an outcome is a game changer not only for Europe, but globally as it will head to a GFC mark II.  Now I don’t want you all to panic just yet, as government and regulators will no doubt step in to curb any serious run on liquidity within the EU, but even so, such a confidence shift will still have a huge delaying effect on the global economic recovery.  Such a major event will see downward pressure on rates in the near to medium term.

And what’s this about China I hear you ask?

Of late the economic data out of China has been quite positive and we know the government has a huge war chest of money for any further stimulus that might be required, but my broader question is how long can they sustain growth rates around the this 8% GDP level?.

This compounding growth rates at some point has got to slow down, as their economy matures and reaches its final destination as the No. 1 economy in the world, which I’m pretty confident will happen at some point in the future considering the Chinese restless drive for better living standard and consumer consumption of such a large population. Yet, we still have to see a slowing and with this slowdown we will see our raw materials, namely Iron Ore, Coal and Gas finally come off their mining boom highs and the flow on effect will be less mining jobs and lower real wages in this sector.

The harder part about this story is ‘when?’ If sooner, then we will see a sizeable impact on our mining and also our ‘real’ economy and naturally we’ll see an economic slowdown which will again have a lowering effect on interest rates.  If it takes another 10 years, then the impact will potentially be bigger if we just look at China in isolation, but if the rest of the world has their act in order, maybe it might not be as big a problem as it would be if it happened in parallel with the EU mess and let’s not forget our US friends.

 

(Those people reading this should be reminded this is an opinion comment by Ben Kingsley, and should not be used when making decision about financial matters without seeking further clarification and understanding of your own personal circumstances. This article is not advice you should rely upon. I recommend you speak to one of our licensed professionals before taking any action with your financial affairs.)