Tuesday, March 03, 2009

A rate cut today?

It could go either way

We'll know at 2.30 pm AEDT

The Reserve Bank board is likely to leave interest rates steady when it meets today, Tuesday, despite overwhelming evidence that Australia is on the edge of recession.

Relentlessly negative data on profits, sales, inventories and production released Monday suggest that Australia's economic growth will be negative when the official figures for the December quarter are released tomorrow, Wednesday.

If in addition the barely-positive growth already reported for the September quarter is revised down, Australia will have experienced 2 successive quarters of negative growth - the popular definition of a recession.

"The news is dreadful. It shows extreme weakness no matter how you cut it," said ABN AMRO economist Kieran Davies...

"The Australian economy may have contracted by as much as 1 per cent in the December quarter."

"Inventories fell by almost 2 per cent as firms slashed stocks rather than produced goods. Sales fell even faster, dropping 2.2 per cent. Every industry except for retail, which benefited from Government cash handouts, fell sharply."

"Company profits are a shocker," said ANZ economist Katie Dean. "The 6.5 per cent fall is the biggest quarterly drop in about six years. Outside of mining, profits collapsed 11.3 per cent."

The Australian Industry Group's survey found that manufacturing output fell for its 9th successive month in February with employment falling for the 12th successive month.

Ai Group chief executive Heather Ridout described the shutdown in employment as "extraordinary".

"It suggests that companies are looking quite actively to reduce costs by reducing employment. We've already lost about 40,000 jobs out of manufacturing in the six months to December. This suggests there will be further pressure on employment," she said.

Treasurer Wayne Swan Monday prepared the ground for news of an Australian recession warning of "a dramatic impact on growth" from developments offshore.

"Something like 7 of our top 10 trading partners are now in recession and there’s no doubt that that flows through quite quickly when you’re dealing with trading partners such as Japan."

Japan's economy shrank an annualised 12 per cent over the December quarter, its worst result since the mid 1970s recession. The US economy shrunk an annualised 6 per cent, its worst result since 1982.

Australian shares slid a further 2.8 per cent to a new 5-year low Monday on the back of the US and Australian news and a decision by the ratings agency Moody's to switch its outlook for Australia's top banks from "steady" to "negative". The Australian dollar slipped one US cent to 64.35 US.

The Reserve Bank board will use additional data to be released during this morning's meeting to help it decide whether to cut interest rates once again for the sixth successive time. It will announce its decision at 2.30 pm.

Another cut of 0.50 percentage points would take the Bank's cash rate to a new low of 2.75 per cent and if fully passed on would take some variable mortgage rates below 5.00 per cent.

But much of the current bad economic news has already been factored into the Bank's calculations and there is a feeling amongst Bank staff that the halving of its cash rate since September needs to be given time to have its full effect.