NAB Index Reveals Broader Australian Economy Merely Limping Along
The results of the most recent monthly business survey conducted by Australian banking major NAB makes it clear that the economy is operating at two speeds, with the mining sector leaving the rest of the economy in its wake.
Overall, though, the economy is merely limping by.
Apart from a dip during the first couple of months, due to natural disasters hitting eastern Australia, the NAB index of business conditions hit its lowest level in May since early 2009, when the economy was still dealing with the aftermath of the global financial crisis.
The index is produced based on a number of measures including employment, profitability and trading conditions.
During May, all three were either at or very near their lowest levels for the last couple of years, excluding the period at the start of the year. However it would be inaccurate to describe the performance of various sectors as being far from even.
But the performance between sectors is far from even.
“Conditions in retail, manufacturing, wholesale and construction are still very poor, while mining conditions outperformed all other industries” said NAB.
The economy is being weighed down by a number of factors including historically higher than average interest rates, property and equity markets which are stagnant, a fiscal policy which is tight, the strong domestic currency, caution being expressed by both households and businesses, tighter lending criteria being imposed by banks, rising energy prices, the Japanese Tsunami and a round of tightening taking place in Asia.
Bubbling underneath all of that. is fears that the property market in China is overextended and may cause a crash in that country’s economy, and worries over whether the debt crisis in Europe will continue to worsen before it gets any better.
Economists believe however that many of those factors will be mitigated by the effects of the long and protracted boom in mining, though economists fail to agree on the actual timing of any recovery in the broader economy.
Most economists expect at least one rise this year. The NAB’s economists reiterated their forecast of two increases in the cash rate by the end of 2011 in a note attached to the results of the index.
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Australian Central Bank Expected To Hold Rates Steady
When the Reserve Bank of Australia meets next week, it is likely to spare the Australian consumer from yet another interest rate hike, however the central bank is more than likely to raise interest rates soon, and do so more than once before the year is out.
Eleven economists polled by the APP news agency all said they believed that the RBA would maintain the cash rate at 4.75 per cent when it meets to decide policy on Tuesday.
Ten out of the eleven economists said they expect the central bank to lift the cash rate to 5.0 per cent during the September quarter.
Seven of the eleven economists polled say they believe there will be at least a couple of rate hikes before 2011 comes to an end, which would mean by the end of the year, the cash rate would stand at 5.25 per cent.
The resources boom is widely expected to raise the economic growth rate to 4 per cent, however such torrid growth produces the risk of higher inflation. The central bank typically uses interest rates as a tool to moderate inflation, which it targets at between two to three per cent.
Earlier in the week, GDP data caught many by surprise, when figures were revealed suggesting that that the economy had actually experienced a contraction for the first time since September 2008, during the height of the global financial crisis.
The contraction was attributed to a large decline in the amount of coal that was exported as a result of mines that were shut down during the flooding that took place over the summer.
James McIntyre economist at Commonwealth Bank says he believes rate hikes will occur in August and November, and that GDP data strengthens the case for mid year tightening by the central bank.
“So we had a supply side disruption, which drove the GDP figures into the red, but the rest of the economy, domestic demand in particular, was very strong,” Mr McIntyre said.
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Australian Central Bank Decision To Sell Gold Reserves Cost Country $5 Billion
Just over ten years ago, Australia’s central bank the RBA sold off most of the countries gold reserves under the belief that the price of gold would continue to remain flat, and that as an asset, it would no longer play any role in the future financial system, or any crises that may result.
Based on the current market price of $1,400 an ounce for gold, the decision to sell 167 tonnes of the precious metal by the central bank has cost Australia approximately $5 billion.
A paper written by the central bank which recommended selling off the gold reserves conceded that that asset whilst the assets served as “insurance against a breakdown in the international financial system”, it was not necessary to hold.
In recommending the decision the paper went on to add that Australia did not need to be overly concerned about selling off its existing gold stock because it has vast reserves of the precious metal, though according to Geoscience Australia, the country has reserves that will last no more than 30 years.
In 1997 the Reserve Bank of Australia sold 167 tonnes of gold over a six month period, reducing the nation’s gold reserves to just 80 tonnes. Over that period the value of its gold holdings declined to $1.1 billion from $3.6 billion.
The sale of gold by the Australian central bank had a significant impact on world gold prices, sending them tumbling to an 11 year low, returning just $2.4bn for the gold that was sold via a single broker engaged without a tender. The same amount of gold would be worth about $7.4bn today.
The central bank’s justification for reducing its gold reserves so drastically was that gold represented a poor investment, and Australia had successfully integrated itself into global financial markets, and that it need not worry about access to those markets during a financial crisis.
Since the sale of the gold reserves the global financial systems has experienced severe stress on a number of different occasions, starting with the implosion of the technology bubble at the start of the millennium followed by the September 11th terrorist attacks, and more recently the global financial crisis in 2008.
The price of the precious metal over that time frame has risen spectacularly and the asset has begun to play an increasingly important role in the global financial system since the financial crisis.
The central bank argued that continuing development of financial system meant that circumstances which would require Australia to call upon our gold holdings for economic reasons looked increasingly remote.
“Central banks traditionally hold gold because of its ability to be used in the event of a crisis in the international financial system; it is the only reserve asset that is not a claim on some other government, international institution or bank. However, over the past two or three decades, the world has experienced a number of economic ‘crises’, but gold played no part in coping with them,” the paper said.
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Australian Retail Sales Edged Up In November
Despite multiple rate rises enacted by the Australian central bank, Last year November retail sales still managed to grow, all be it marginally by 0.3 per cent, which was in line with expectations.
According to the latest data released by the Australian Bureau of Statistics (ABS), November retail sales increased to a seasonally adjusted $20.328 billion, after a revised 0.8 per cent decline during October.
Analysts had forecast a 0.3 per cent rise in sales, seasonally adjusted.
Michael Blythe, chief economist of Commonwealth Bank of Australia said that whilst the rise in retail sales was positive, the data suggests that consumers, despite their rising income levels remain cautious.
“To get any rise at all in retail sales in November, given we had sort of a double-whammy rate rise, is probably not a bad result. Other parts of the consumer story still look pretty strong, motor vehicle sales are holding right up there at very high levels, so it’s a very patchy story. This will give the Reserve Bank some comfort. They were looking for consumer caution to continue and for any increase in income to be saved rather than spent. We’ve still got the next (rate) move up in April.” Mr. Blythe said.
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RBA Says Decision To Hold Rates Driven By Restraint In Consumption And Borrowing
According to the minutes of the most recent board meeting of the Reserve Bank of Australia, the decision by the central bank to hold interest rates steady was driven by restrain in both household consumption and borrowing.
The notes from the meeting however failed to indicate the central bank’s bias on interest rate policy over the next few months and only suggests that the RBA was content with the current interest rate level.
At the start of the month the central bank chose to hold interest rates steady at 4.75 per cent, having lifted the rate from 4.5 per cent in November.
“Employment growth remained strong and the expected pick up in private investment looked to be broadly on track,” the minutes said.
The central bank governing board took note of the fact that despite confidence in the Australian economy, consumption and borrowing remained restrained whilst the household savings rate has risen.
“This restraint, if it continued, would provide some scope for investment to rise without causing aggregate demand to grow too quickly and inflationary pressures to build.”
In maintaining the interest rate at its current level, the RBA considered the impact of the high value of the Australian dollar and interest rate rises by commercial banks.
“Following the board’s decision in November, the decision to lift the cash rate and the subsequent increases in lending rates, and taking into account the level of the exchange rate, monetary policy was judged to be mildly restrictive. Given the very high level of the terms of trade and the positive outlook for business investment, this policy setting was regarded as appropriate.”
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ANZ Boss Mike Smith Latest Banking Chieftain To Rail Against Bank Bashing
Mike Smith, chief executive of Australian banking major ANZ is the latest banking chieftain to rail against bank bashing, once again justifying ANZ’s interest rate policy as one being driven by the “permanently higher” costs of doing business.
Mr. Smith made his comments during the lenders annual general meeting last week and followed similar comments made by ANZ chairman John Morschel who defended ANZ’s decision to lift its interest rates by 120 basis points over and above official interest rate rises since the start of the global financial crisis.
“We believe our mortgages are fairly priced in line with costs and risks,” Mr Morschel said.
Mr. Smith, who made an appearance before the Senate inquiry into competition within the banking industry last week warned of the negative consequences of populist backlash against Australia’s most successful industries including mining, telecoms and banking.
“We support practical measures which will increase competition and consumer choice, without increasing the cost of banking. We also believe it’s important to have a discussion where facts and sound analysis are put on the table, not opinions and empty rhetoric. A critical issue that we have to face up to is the fact that banks now have permanently higher funding costs.” he said.
Mr. Smith also warned that it was apparent that the global economy still faced substantial risk for the recent instability in the Euro Zone region, and re-iterated Mr. Morshcel’s view that whilst the pace of Australian economic expansion was likely to be faster than other developed countries, it was still subject to similar volatility as the US and Europe.
“This includes potential volatility in our funding costs,” Mr Smith said.
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ANZ Chairman Says Australian Economic Recovery To Be Volatile
ANZ chairman John Morschel says that he believes that Australia’s economic recovery is set to be as volatile as anything in the United States and Europe.
Mr. Morschel made his comments during the lenders annual general meeting and added that issues stemming from global financial crisis would continue to resonate throughout the global economy.
The ANZ chairman said that whilse he expects the pace of Australian economic recovery to be faster than it peers, it was likely that the country will face a similar kind of volatility experienced by the US and Europe as they work through their issues.
“This includes potential volatility in our funding costs. The immediate dangers from the global financial crisis have not passed. Although the euro zone seems set to survive, confidence in the EU as a political union continues to erode, and…European banks will need to continue to shore up their balance sheets.” Mr. Morschel said at the AGM.
According to ANZ, Asia ex Japan is expected to expand by about 8 per cent during 2011, which is in stark contrast to the nearly anemic less than 2.5 per cent expected in Europe and the US.
“Australia is expected to continue to perform well, and in New Zealand the recovery is gathering momentum. But with the global economic growth likely to be soft over the medium term, the environment will remain challenging to navigate.” Mr. Morschel said.
The chairman once again said that funding costs have risen post financial crisis and that these costs made it difficult for ANZ to balance its commercial obligations with the expectations of its customers and the community.
Against that backdrop Mr. Morschel warned that populist driven policy on banking competition would be harmful to the Australian economy.
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Australians Saving The Most In Over Two Decades Against A Backdrop Of Slower Economic Growth
As interest rates have steadily risen over the last year, new data shows that ordinary Australians are saving the most they ever have in two decades. Economists attribute the trend to being as a result of consumer concern over the direction of interest rates and the future trajectory of the economy.
National income accounts data which was released on Wednesday shows that growth of the Australian economy slowed down during the September, expanding by a moribund 0.2 per cent, the slowest recorded level since the end of 2008, when the financial crisis was at its greatest, and the fifth slowest recorded growth rate since 2000.
Consensus growth forecasts by a majority of economists had been 0.5 per cent, and the sluggish result is likely to compel the central bank to hold interest rates steady until well into 2011.
The GDP data and the prospect of steady interest rates resulted in a sharp fall in the value of the Australian dollar against the US dollar, with the futures markets pricing in a 3 per cent probability of the Reserve Bank of Australia cutting interest rates during its final board meeting of the year scheduled next week.
Australian households however seem to be saving more, with the savings rate the highest it has been since 1987 excluding the period of last year’s fiscal stimulus.
The Australian household savings rate touched 10.2 per cent during the September quarter, sharply higher than the 8.2 per cent recorded during the previous quarter.
Savanth Sebastian an economist with CommSec Securities was quoted in The Australian as saying that the reason behind the higher savings rate was an increased level of national income as a result of the resource boom.
“The extra dollars coming in aren’t being spent. Consumers and business are holding on to the cash until the economic recovery gains traction. The double-digit household savings ratio and weak private sector investment outside the mining sector adds weight to this argument.” Mr. Sebastian said.
Australian Prudential Regulation Authority (APRA) data released this week echoed the view that the savings rate had reached its highest level in two decades.
According to APRA household deposits placed with the big four banking groups rose by an annualized 8 per cent in October. Term deposits grew even faster, by 21 per cent over the last year according to the Reserve Bank of Australia.
The RBA figures show $422.4 billion was held in term deposits in October compared with $348bn last year.
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Wayne Swan Slams Coalition Demand To Re-Regulate Interest Rates
Federal Treasurer Wayne Swan has dismissed demands by the Coalition opposition for re-regulation of interest rates as being “absurd”.
Not all Coalition MP’s are united in their support of such measures, with one Liberal suggesting the idea came from the “lunatic fringe” before being made aware that it came from within his own party.
The opposition is pushing for the Federal government to take Australia’s major lenders to task over interest rates, accusing the government of being all talk and no action.
Australia’s major lenders have signalled their intention to raise their standard variable home loan rates, despite the fact that the Australian central bank held interest rates steady at the start of the month.
Tony Abbot, leader of the opposition said that the government was ineffectual. Joe Hockey shadow Treasury spokesman said that the major lenders were not listening to warnings by the Treasurer on interest rates, despite the fact that the government enacted policy which helped prop up the banks during the financial crisis.
Mr. Swan, in his response to calls for re-regulation said: “an absurd intervention from Mr. Hockey, who was asked time and again (in an interview) what he would do differently, and had no answers, just incomprehensible bluster”.
“Just last week we had the shadow finance minister advocating the government intervene with the floating dollar, and now we have the shadow treasurer saying we should jump in the time machine and remove the RBA’s independence by re-regulating interest rates,” he said.
“No wonder Joe Hockey has no economic credibility, not even Malcolm Turnbull or Don Randall from his own party are prepared to support his latest piece of ill-considered rubbish.”
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Australian Central Bank Expects To Tighten Interest Rates Sooner Rather Than Later
The Australian central bank released the minutes of its last board meeting which reveal that it does not intend to wait indefinitely before it raises the cost of borrowing again.
The Reserve Bank of Australia chose to hold interest rates steady when it met at the start of the month as it sought more data, however, according to the minutes of the meeting, the argument was made for tightening interest rates.
According to the minutes of the October 5th policy meeting, the central bank made the decision to hold official interest rates steady at 4.5 per cent since the economy was expected to maintain trend growth rates, softening credit growth and an appreciating Australian dollar would have the effect of keeping monetary conditions tight.
The central bank said its decision to hold interest rates steady, which surprised the financial markets was “finely balanced” and added that the timing of future interest rate increases “remained a matter of judgement”.
“While the board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion,” it said.
The central bank board will meet again in early November, by which point it will have has the opportunity to assimilate third quarter inflation figures. The central bank expects inflation will rise to the top of its 2-3 per cent target inflation range over the next year and a half.
The pace at which the Australian dollar appreciates will have a large impact on the RBA’s decision after last week’s rise to parity against the US dollar.
The central bank said that economic conditions were evolving, with demand growth remaining moderate as public spending falls and fresh business investment had yet to fill the gap.
“The outlook remained for public spending to slow, but for private demand to pick up noticeably. For the moment, however, indicators of current growth in demand remained moderate,” it said.