Should you worry about the economy?

There’s been a lot of moaning in the past week over the state of the economy, sparked by the latest quarterly growth figure of 0.3 per cent, putting annual growth down at 2.7 per cent.

Economists had been predicting 0.7 per cent so the figure was given shock treatment in the media when it came in below the 0.5 per cent increase in the June quarter.

While it’s true that the economy is slowing as the investment boom in resources winds down, so far it’s been partially cushioned by the apartment building boom on the east coast.

So did the GDP slowdown  warrant calls by leading economists for the Reserve Bank to immediatelty cut interest rates from their already historic lows of 2.5 per cent?

The is no doubt that Australia’s terms of trade is contracting must faster than everyone anticipated and that has a resulted the $A is finally heading down to a more realistic US82 cents. This will put pressure unemployment and the nation’s standard of living, not to mention the Federal Government’s budgetary problems. But as Treasurer Joe Hockey keeps reminding us – we’re been living beyond our means for too long.

Thankfully the RBA doesn’t have to make a decision on interest rates until it meets again in February. Like the rest of Australia it goes to for a long sleep after Christmas dinner and can’t get up again until after Australia Day festivities have been concluded.

That just might give us a chance to digest the Christmas retail spending numbers, plus a chance to study what’s really happening in a still overheated property market.

The RBA doesn’t want to cut rates only to rekindle irrational housing prices. It’s when people stop spending you have to worry.

So let’s look on the bright side for moment.

Firstly those GDP numbers are historical and subject to revision. Taken on the bald numbers the GDP figure still represents the 24th consecutive year of growth. Much was made of two negative quarters of income growth, but with such a sharp decline in the terms of trade this was to be expected.

The growth number of 2.7 per cent was below the decade-average growth rate of 2.8 per cent and below the 15-year average of 3.0 per cent . . . but not by much. More worrying was the fact that on an annualised number most of the GDP growth came from the December quarter of 2013.  The decline in productivity was also of concern.

Even though most economists read the GDP number as a worrying slowdown, consumer spending rose 0.5 per cent in the September quarter to be up 2.5 per cent for the year. Although the figure was soft, only four of the 17 sectors recorded weaker spending in the quarter while in the industry sectors 12 out of 19 monitored by CommSec expanded in the quarter.

Much will depend on the Christmas retail figures and what happens to unemployment in the near future though job ads and hiring expectations seem to be on the rise.

Both business and consumer confidence surveys are showing some nervousness.

As always Australia is held captive by forces outside its control. There is a growing expectation that China will downgrade its growth forecast, perhaps from 7.5 to 7 per cent. This would put more pressure on resource exports and revenue and do little to restore sharemarket confidence.

The strength of the US economy also raises the question of when will America start to normalise (lift) rates. The greenback is already on a roll which is forcing down the Australian dollar to its lowest rate in two years.

Strangely enough this is another factor that might stay the RBA’s hand on a rate cut but it would like to see that currency decline spread across all currencies.

The sudden fall in petrol prices is another factor that overall is positive for the nation. Most of Australia’s energy exports are delivered under long-term contracts in US dollars.

Most economists are now predicting that with slowing growth and rising unemployment the RBA will cut interest rates in the first half. CommSec doesn’t see any rate cut coming until the second half.

Data News feels that the RBA will play a ‘wait and see’ game and hope the lower $A will act as a pseudo rate cut, which means that 2015 could be just like this year. Steady as she goes, through a sea of challenges, only to arrive where we started. .

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