Mostly agree Dopey - so far but outlook is deteriorating rapidly. I read the RBA comments today some interesting points IMO.
"Financial markets have responded positively over the past couple of months to signs of progress in addressing Europe's financial problems, but expectations for further progress are high."
What the hell are they smoking when they refer to signs of progress? Europe is past the point of no return and only talk, smoke and mirrors holding it together. Europeans have never agreed on anything. Even the recent Spanish bail out was a mess - on again off again.
No wonder the RBA were still raising rates in Feb and March 2008 as debt markets were out of control. Did not ever start to lower until Sept 08 and even then only 0.25%. It would pay them to look out the windscreen occasionally instead of the rear view mirror offset by a month or so.
"Inflation remains low, with underlying measures near 2 per cent over the year to June, and headline CPI inflation lower than that. The introduction of the carbon price is starting to affect consumer prices in the current quarter, and this will continue over the next couple of quarters."
Carbon Tax impacting and yet I hear retailers are trying to absorb costs due to weak demand. They also fear consequences if they speak out. The RBA previously stated that 'the effects of the CT would largely be over by the end of 2013' which is 5 quarters away. Once factored the inflation cannot be recounted however the higher costs will then be baked in.
"The Bank's assessment is that inflation will be consistent with the target over the next one to two years. Maintaining low inflation will, however, require growth in domestic costs to remain contained as the effects of the earlier exchange rate appreciation wane."
There is a problem right there - CT pushing up inflation (Sept 2nd ann MI Inflation Gauge m/m +0.6%) but they declare domestic costs required to be contained. (We also have a much bigger problem potentially with the exchange rate.)
"As a result of the sequence of earlier decisions, interest rates for borrowers are a little below their medium-term averages."
And miles above the rest of the developed world which is causing other problems. From Variant The Unlucky Country:
"Australia is a classic case of the Dutch Disease. The Dutch Disease denotes the loss of competiveness in the tradable manufacturing and industrial sector as a result of a resource/commodity boom which leads to an overvalued real exchange rate. In Australia, the mining sector has crowded out almost all other sectors of the economy and also funnelled credit and liquidity into a housing bubble in the real estate sector."
And... "Australia net external debt levels resemble those seen in the European periphery; the currency is fundamentally vulnerable. Australia has been running a persistent current account deficit since 1980 and the country’s negative net international investment position is one of the largest in the world. On this background, the strong currency makes no sense and fundamentally the currency is very vulnerable to capital flight from the banking system."
And... "Australian banks and corporates rely heavily on foreign funding; the RBA will have to provide liquidity through LTROs. Structural global deleveraging and stop-go flows add volatility for Australian banks. As the housing market continues to correct, it may be difficult for Australian banks to fund themselves. Lowering interest rates will hurt the margins of the banks, and the RBA will likely be forced into domestic liquidity operations to prop up its banks.
Two options to weaken the currency, lower rates or a balance of a payments crisis. The Australian currency will weaken in one or two ways. Either the RBA gradually reduces interest rates to accommodate a structurally slowing economy and a relative end to the mining boom or the economy will suffer from a balance of payment crisis as external financing dries up due to the decline in the terms of trade exposing the negative current account."
Lagging indicators do not show up headwinds and real issues that we must confront now. The government spending is also out of control just as revenues fall. The banks will need a bailout and we will have to pay.
Dopey I believe that at some point the foreign investors will rush out (as above) and have been warning clients about this. You will see a collapse in the AUD and all sorts of pressures if this comes to pass. Then we will be sorry the debt per capita is so high now.
