Sorry to pop your bubble ACB
Not in the clear on rate rise
Matt Wade
June 2, 2011
Comments 1
IF YOU are hoping the big contraction in the Australian economy last quarter will put an indefinite hold on interest rate rises, you'll probably be disappointed.
Yesterday's GDP result was surprisingly weak thanks to the short-term effects of natural disasters. But the growth setback is temporary. Some important underlying economic indicators in the national accounts told a very different story to the headline figure.
Domestic final demand was strong and business investment grew at a healthy clip. Consumer spending rose and the household savings ratio jumped from 9.7 per cent to 11.5 per cent, a 24-year-high in trend terms.
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That shows Australian households were able to increase both spending and savings at the same time in the March quarter - hardly a sign of an economy on the brink.
Australia's terms of trade - our export prices relative to the price we pay for our imports - were already at 140-year highs but jumped another 5.8 per cent in the March quarter.
A surprise increase in the national accounts measure of wage costs added to worries that inflationary pressures are building. Meanwhile, the unemployment rate has fallen to 4.9 per cent, its lowest level in more than two years.
Natural disasters often cause economic figures to follow a ''V-shaped'' pattern, where a sharp fall is followed by a rapid recovery. That means the March quarter's weak result could be followed by a strong recovery in the next two quarters as businesses hit by floods and cyclone gradually return to full production.
The complex economic picture presented by the national accounts was reflected in the performance of the states. Demand in Queensland and South Australia fell while Western Australia, Victoria and Tasmania all posted strong gains. NSW experienced a relatively soft March quarter, with state demand growth of 0.4 per cent, but annual growth was a respectable 2.8 per cent.
But regional disparities will not stop the Reserve Bank board from lifting interest rates if it believes inflation is on the rise.
The Reserve predicted the effects of the natural disasters were likely to cause a contraction in the March quarter but said it would ''look through'' these temporary effects on inflation and growth to set interest rates based on the medium-term economic outlook.
While the contraction in March quarter GDP was bigger than expected, many investors and economists still think rate rises aren't far away.
The bond markets that predict movements of official interest rates have factored in about a 50 per cent chance of a rate rise by August or September. Westpac's economics team is still tipping a July rate increase and the HSBC economist Paul Bloxham thinks rates will be a full percentage point higher by this time next year.
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