RBA Rates Decision – June 2011

The RBA held off increasing the cash rate / interest rates once again this month, as it digests the March Quarter GDP data.  The numbers for the quarter weren’t good, driven by the natural disaster events in Queensland.  These events caused significant disruption to the mining industry, due to major infrastructure damage from these events.

The poor GDP numbers clearly highlight the level of impact the mining sector has on our overall economy.  We heard most commentators start quoting the “Two Speed Economy”.  The reference relates to the Mining Sector – High Speed, which given demand and record high commodity prices, is a sector of the economy that is providing significant input to our terms of trade and this flows through to the GDP numbers.   The Slow Speed economy is pretty much the rest of the economy that makes up the remainder of the GDP numbers.

So when you have events like the natural disasters in Queensland, we clearly see the impact to GDP figures (down 1.2% for the quarter), and importantly it highlights that during this period the other sectors that make up our overall Gross Domestic Production have somewhat struggled to add growth to our economy.  It’s clear that consumers are not in the mood to spend money, and all the noise about property values in the media is also affecting sentiment and creating uncertainty in the economy. (You can read more about property values in my director’s comment later in this newsletter.)

Most economists and commentators do believe this is simply a ‘blip’ and once the mines come back online in Queensland, that GDP will head towards 3-4%, which is the area that will see the RBA looking closer at interest rates in the second half of this year, with a likely rate rise of 0.25% before the end of the year.

Below is a snippet from a St George’s Morning Report, which was worth a read so I have added it to this month’s newsletter

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Source: St George Morning Report – 6^th May 2011
Australia:  Yesterday’s retail spending data makes it clear that consumers are continuing to wrap themselves up in cotton wool. Consumers are saving more and spending less. The value of retail sales unexpectedly fell 0.5% in March, raising worries that the caution among consumers is deepening. The impact of the natural disasters is still washing through the data and a late Easter also likely played havoc with the seasonal adjustment process. But even in trend terms (which smooths the data), retail spending growth was soft, albeit steady, growing 0.1% in March and by 2% in the year to March.

Retail sales volumes were flat in the March quarter, suggesting downside risk to the March quarter GDP numbers when they are released in early June.

The consumer remains the swing variable for the domestic economic outlook this year.  The RBA has previously welcomed the caution exhibited by consumers because it has helped the RBA do its job in fighting inflation. But if consumers dig a deeper burrow in coming months, the growth outlook for the domestic economy will be tempered. It then brings the risk that the RBA will have less tightening to do.

In other data released yesterday, building approvals jumped 9.1% in March, after consecutive falls of 5.3% and 10.7% in January and February, respectively. Over the year to March, approvals were down 18.1%, the weakest since February 2009. Behind the March increase was a 26.1% jump in the more volatile other dwellings series. Meanwhile, approvals in private sector housing remain weak; this category declined by 0.8%. Despite the bounce in March, growth in approvals remains quite weak and in trend terms is still contracting. Ongoing weakness in dwelling approvals indicates that Australia’s chronic housing shortage looks set to continue.

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(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.)