THE Australian economy is slowing rapidly as inflation moderates and cautious consumers save rather than spend.
As the Reserve Bank yesterday kept interest rates on hold at 4.75 per cent for the seventh consecutive board meeting, governor Glenn Stevens signalled that the bank would lower its forecast for growth in its quarterly monetary policy statement next month, citing subdued household spending, the high Australian dollar and a slower than expected recovery from the summer floods.
"Growth through 2011 is now unlikely to be as strong as earlier forecasts," he said after his monthly RBA board meeting.
Deutsche Bank said the RBA's 4.25 per cent forecast for economic expansion, topping Treasury's budget estimate of 4 per cent for 2011-12, was now almost impossible to achieve.
In February, the RBA raised its projections for gross domestic product growth this year to 4.25 per cent, "boosted by the recovery in coal production from the effects of the floods" in Queensland. But Deutsche Bank said to achieve that figure "growth would have had to average an implausibly high 1.8 per cent quarter on quarter in the second, third and fourth quarters".
Mr Stevens also raised global economic uncertainty and forecast that inflation would remain under control, reversing a previous expectation that inflation would rise above the bank's 2-3 per cent comfort band. "CPI inflation is expected to be close to target over the next 12 months," he said yesterday.
Westpac senior economist Justin Quirk said the Reserve Bank retained its "tightening bias" but had time to monitor conditions before deciding whether to raise rates. "We are confident there will be no rate hike in August," he said. "We see the first possible window for a hike as the November meeting. That would require an improvement in consumer spending and more clarity on the situation in Europe."
The receding chances of a rate raise at next month's board meeting sent the Australian dollar falling from $US1.07c to $US1.0665.
Wayne Swan said the Reserve Bank's decision to leave the official cash rate unchanged at 4.75 per cent for its seventh meeting in a row was "good news for the many Australian households and businesses doing it tough in our patchwork economy".
But "despite the soft spots and the higher dollar making things even tougher in some sectors, we shouldn't lose sight of the fact that our economic fundamentals are strong, with low unemployment, record terms of trade and a huge pipeline of mining investment", the Treasurer said.
Trade data out yesterday confirmed Australia was benefiting from exceptional terms of trade, with high commodity prices pushing the surplus in May up $716 million to $2.33 billion - its fifth-highest on record.
But export volumes for key resources disappointed, down 3 per cent for thermal coal, 11 per cent for semi-soft coal and 3 per cent for metal ores and minerals.
"Despite the strong rise in gold exports in May, net exports is still only expected to make a relatively small contribution to second-quarter GDP growth, after subtracting a large 2.4 percentage points in the first quarter," ANZ said in a research note.
An Australian Chamber of Commerce & Industry survey of investor confidence also underlined the patchiness of the economic recovery, with all actual and expected business indicators bar expected wages growth falling over the June quarter. And new vehicle sales fell in June to 96,157, the lowest level in eight years, largely because of tsunami and earthquake supply disruptions to car imports from Japan.
The RBA yesterday identified sluggish household borrowing and spending, soft house prices and slowing jobs growth as brakes on the economy. But it predicted inflation would return "close to target" over the next 12 months once the price shocks from the floods subsided.
"Clearly the Bank's position continues to evolve, which is only natural as economic data and global events pans out a little different to expectations," Mr Quirk said. "Some like to point the strength, or lack of strength, in the labour market as a key indicator to watch. Others may suggest that the CPI is the key indicator. We think the RBA will be taking a more holistic approach."
Interest rates rose seven times from 3 per cent between October 2009 and November last year as the economy recovered strongly from the global financial crisis. They have been steady at 4.75 per cent since. Most economists believe that the Reserve Bank will hold rates steady next month and may not move until the last quarter of this year at the earliest.
Source: www.theaustralian.com.au
As the Reserve Bank yesterday kept interest rates on hold at 4.75 per cent for the seventh consecutive board meeting, governor Glenn Stevens signalled that the bank would lower its forecast for growth in its quarterly monetary policy statement next month, citing subdued household spending, the high Australian dollar and a slower than expected recovery from the summer floods.
"Growth through 2011 is now unlikely to be as strong as earlier forecasts," he said after his monthly RBA board meeting.
Deutsche Bank said the RBA's 4.25 per cent forecast for economic expansion, topping Treasury's budget estimate of 4 per cent for 2011-12, was now almost impossible to achieve.
In February, the RBA raised its projections for gross domestic product growth this year to 4.25 per cent, "boosted by the recovery in coal production from the effects of the floods" in Queensland. But Deutsche Bank said to achieve that figure "growth would have had to average an implausibly high 1.8 per cent quarter on quarter in the second, third and fourth quarters".
Mr Stevens also raised global economic uncertainty and forecast that inflation would remain under control, reversing a previous expectation that inflation would rise above the bank's 2-3 per cent comfort band. "CPI inflation is expected to be close to target over the next 12 months," he said yesterday.
Westpac senior economist Justin Quirk said the Reserve Bank retained its "tightening bias" but had time to monitor conditions before deciding whether to raise rates. "We are confident there will be no rate hike in August," he said. "We see the first possible window for a hike as the November meeting. That would require an improvement in consumer spending and more clarity on the situation in Europe."
The receding chances of a rate raise at next month's board meeting sent the Australian dollar falling from $US1.07c to $US1.0665.
Wayne Swan said the Reserve Bank's decision to leave the official cash rate unchanged at 4.75 per cent for its seventh meeting in a row was "good news for the many Australian households and businesses doing it tough in our patchwork economy".
But "despite the soft spots and the higher dollar making things even tougher in some sectors, we shouldn't lose sight of the fact that our economic fundamentals are strong, with low unemployment, record terms of trade and a huge pipeline of mining investment", the Treasurer said.
Trade data out yesterday confirmed Australia was benefiting from exceptional terms of trade, with high commodity prices pushing the surplus in May up $716 million to $2.33 billion - its fifth-highest on record.
But export volumes for key resources disappointed, down 3 per cent for thermal coal, 11 per cent for semi-soft coal and 3 per cent for metal ores and minerals.
"Despite the strong rise in gold exports in May, net exports is still only expected to make a relatively small contribution to second-quarter GDP growth, after subtracting a large 2.4 percentage points in the first quarter," ANZ said in a research note.
An Australian Chamber of Commerce & Industry survey of investor confidence also underlined the patchiness of the economic recovery, with all actual and expected business indicators bar expected wages growth falling over the June quarter. And new vehicle sales fell in June to 96,157, the lowest level in eight years, largely because of tsunami and earthquake supply disruptions to car imports from Japan.
The RBA yesterday identified sluggish household borrowing and spending, soft house prices and slowing jobs growth as brakes on the economy. But it predicted inflation would return "close to target" over the next 12 months once the price shocks from the floods subsided.
"Clearly the Bank's position continues to evolve, which is only natural as economic data and global events pans out a little different to expectations," Mr Quirk said. "Some like to point the strength, or lack of strength, in the labour market as a key indicator to watch. Others may suggest that the CPI is the key indicator. We think the RBA will be taking a more holistic approach."
Interest rates rose seven times from 3 per cent between October 2009 and November last year as the economy recovered strongly from the global financial crisis. They have been steady at 4.75 per cent since. Most economists believe that the Reserve Bank will hold rates steady next month and may not move until the last quarter of this year at the earliest.
Source: www.theaustralian.com.au
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