Gloom but not doom on the economy

What a miserable week for the Australian economy, but is it as bad as it seems?

First the market overshoots on the gross domestic product (GDP) numbers which show that the economy is just ticking over enough to hang on to its claim of a quarter of a century of economic growth.

The quarterly 0.2 per cent figure gives the country an annual 2 per cent growth number, slightly below the revised trend number in the Government’s budget.

The share market, already spooked by the drawn-out end of the mining boom and a fairly ordinary profit season, responds alarmingly to lower manufacturing numbers out of China. It retreats to it lowest level since the global financial crisis (GFC).

The GDP figures send the Australian dollar through the US70c barrier with predictions that it will go lower. The $A is now at a six-year low or 14 percent down on the calendar year and 21 per cent down from its peak of only two years ago.

A day later the market is again surprised by retail consumption figures, which show a negative 0.1 per cent when expectations were around a positive 0.4 following strong numbers in June. Still sales are up on the year at 4.2 per cent.

It looks like Treasurer Joe Hockey’s small business stimulus package was all spent in June – before the end of the financial year – so it should have been no surprise that July was weak.

However inside the numbers the drop in housing related spending, alongside electrical and electronic retailing was surprising. Anyone who lives close to a transport hub knows there is a housing construction boom taking place in the southern states and upon completion those houses – mostly apartments – have to be filled with white goods and furnishings.

Higher property prices, low interest rates and lower petrol prices have seen Australian household wealth and finances improve, which has resulted in retailing being one the brighter spots on theshare market. (let’s not talk about Myer).

So let’s hope the market is right and the August retail numbers pick up.

And that shrinking Australian dollar has some positives to it. As in previous economic downturns it’s acting exactly as it should by making the economy and key export industries more competitive, plus cushioning our resource exporters to a certain extent. (You can see why BHP and Rio are increasing volumes even as depressed prices).

During the week the Reserve Bank again kept interest rates steady and was quite sanguine in it outlook. This is because the falling $A is doing its work for it, perhaps even more efficiently. The cash rate looks like staying at 2 per cent for quite a while if the currency keeps retreating with RBA Governor Glenn Stevens still of the opinion that longer-term growth and unemployment will return to normal over the next few years

Remember, if you look at the longer-term currency charts you can see that the $A also sank during the global financial crisis in 2008, and again retreated and protected the country during the Asian financial crisis back in the 1990s.

Of course there will be winners and losers if the currency keeps retreating. Most analysts are saying it will stabilise around US70c, but others have it sinking possibly into the US50c range if things continue to deteriorate in China.

Obviously a lower currency will put pressure on Australians’ purchasing power but a quick look at global currencies shows Australia is not alone in the currency wars. While the American dollar is the strongman globally, other resource-based countries like Canada, South Africa and Brazil are in worst shape than Australia. And with all its recent ructions, the Euro is also running at 12-year lows.

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