Tuesday, January 19, 2010

"Inflation's low, but we'll put up rates anyway"

That's how it will probably play out when this board meets on February 2

If the Reserve Bank board paid attention only to Australia's official inflation rate due for release next week it'd put up its feet and leave interest rates alone.

But the December quarter CPI, now expected to come in at just 0.1 per cent and 1.7 per cent for the year to December will scarcely figure in its calculations.

"It's the base, the starting point, but the board's job is to be forward looking,' says La Trobe University Professor Don Harding who has come up with the 1.7 per cent forecast for the Melbourne Institute.

"The board will look at it, see there's not much inflation in the system, say that's nice to know, but then say... the labour market is getting tight, retail sales looking strong, any number of indicators are looking strong and we probably think inflation is about to pick up."

The TD Securities - Melbourne Institute inflation gauge compiled using the same price sampling techniques as the the Bureau of Statistics index, but monthly and more cheaply is usually in step with the Bureau's. The Institute says it's accurate to five one-hundredths of on per cent.

Which puts Professor Harding in an odd position. He thinks he knows what the official rate will be next Wednesday, he thinks it will look benign, yet believes the Bank will crank up rates again anyway.

The detail of Wednesday's result is likely to look particularly encouraging. Of the 90 price groups surveyed by the Institute in December an impressive 48 stayed steady, 23 increased and 19 actually fell, hardly a sign of widespread inflation. Around half the prices measured hadn't moved in six months; around two-thirds hadn't moved in three months.

"By December we almost unwound all of the sustained increase in inflation pressure that had been evident in the Australian economy for several years," Professor Harding concludes in his report, before conceding to The Age/Herald that what will matter is where the Reserve Bank board believes inflation is going rather than where it knows it has been.

Other analysts managed to read an uptick in inflation into Professor Harding's report.

"After a period of clear disinflation over the year from mid-2008, inflation has now not only bottomed out, but early signals suggest some emerging upside pressure," said TD Securities economist Annette Beacher.

"The long period of disinflation has clearly ended," said CommSec economist Savanth Sebastian. "Price pressures though mild are once again rising."

Australia's most-recent official annual inflation rate for the September quarter is 1.3 per cent.

A jump to 1.7 per cent when the December quarter figures are released would see the rate remain below the Reserve Bank's 2 to 3 per cent target band.

Published in today's SMH  and Age 

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derrida derider said...

Hello AUD/USD parity, bye bye Australian manufacturing and tourism.

Inflation is dead as a doornail - its below their stated target range and very likely to stay that way. Real wages are falling in most of the country, and the high dollar means strong competitive pressures on the tradeables sector. Inflationary expectations are spectacularly low.

And China could stop stockpiling our rocks (as they must at some stage - there are now huge mountains of iron ore and coal near their major steel mills) at any time.

carbonsink said...

Who is buying China's exports post-GFC?

That's the question that keeps nagging away at me, and no-one has answered satisfactorily. Pre-GFC China was an export-oriented economy with major markets in the US and Europe. Those markets collapsed in 2008-09 and never fully recovered. China has been stealing market share off other exporting nations thanks to the RMB peg, but its a bigger share of a smaller global trade pie. What it doesn't explain is why China is importing Aussie resources at a much faster rate than the peak of the boom in 2007. What is China doing with all these resources if its not making stuff and exporting to the rest of the world? Its not domestic demand because that's hardly moved. Its apparently all going into infrastructure investment or is being stockpiled (as DD points out above).

Is China's instant transformation from an export-dominated economy into an investment-only economy sustainable? This is a question of huge importance for Australia because China's recovery completely underpins Australia's recovery. I wish Peter Martin would spend more time looking at this question instead of posts like: "Look, aren't the consumer confidence numbers great!".

Perhaps I am totally wrong on China and they will manage their way through to some new world order where China no longer relies on the western consumer, but surely the question deserves more attention.

carbonsink said...

Would you short China? Worth a read!

Read the links to pieces by Thomas Friedman and James Chanos as well.

The comments are fascinating also. Many are by people based in China and most seem convinced a real-estate crash is coming. More than once its suggested the best way to benefit is to short Aussie miners.

Why is it people in China want to short Aussie miners, but here in Australia everyone from the RBA board down can see nothing but upside?

Adam S said...

I had read about James Chanos. The trouble with trying to work what's going to happen in China is who the hell as any credibility! For every Chanos, there are guys like Jim Rogers who says the opposite. As an individual investor and Australia as a nation, the best thing we can do is make sure that our trade and investment networks are wide spread and diverse. For us, that means mending some fences with India for a start. Our brand has been damaged over there. It also means not forgetting two of our largest partners in Japan and South Korea either.

If a meltdown does happen in China, hopefully it will be delayed enough for the US and Europe to have recovered a bit. We have no real way of knowing, however.

carbonsink said...

70% of Australian iron ore goes to China.

China's share increased markedly during the GFC because the Chinese bought more (a lot more) and everyone else bought less. Far from diversifying, Australia's economy and export markets are narrowing. Manufacturing is dying, tourism is in trouble, and education is under stress. We are rapidly becoming a quarry for Asia and extremely vulnerable to a China crash.

Don't get me wrong, in the long term China is unstoppable (and to hell with the environment!) but its the post-GFC boom that defies credulity.

carbonsink said...

A list of China facts and figures:

* At roughly $1.2 trillion in 2008, total Chinese private consumption is only slightly larger than France, and smaller than the UK, Germany, and Japan.
* US consumption – which at roughly $9.4 trillion last year is nearly eight times the size of China’s

* In 1990 consumption represented just a little over 50% of Chinese GDP. Today consumption is around 35% of GDP.
* In 1990 investment represented around 23% of Chinese GDP. Today it is 45% of GDP (which is higher than any major economy in history)
* Retail sales in 2009 were 12.53 trillion yuan.
* The annual growth rates of China's retail sales were 12.9% in 2005, 13.7% in 2006, 16.8% in 2007, 21.6% in 2008 and 16.9% in 2009.
* Fixed asset investment in 2009 was 22.5 trillion yuan (and accounted for more than 95 percent of China’s growth in the first three quarters of 2009).
* The annual growth rates of China's fixed asset investment were 27.2% in 2005, 24.5% in 2006, 25.8% in 2007, 26.4% in 2008, and 30.1% in 2009.

* China's exports in 2009 stood at 1.2 trillion U.S. dollars, down 16 percent from 2008, and imports reached 1.01 trillion U.S. dollars, down 11.2 percent from a year earlier
* In total, China's foreign trade in 2009 dropped 13.9 percent from a year earlier to 2.21 trillion U.S. dollars and its trade surplus last year slid 34.2 percent year on year to 196.1 billion U.S. dollars

So, the take home messages from all this are:
1. The Chinese consumer is not going to drive global growth anytime soon.
2. Rather than "rebalancing" towards a more consumer-driven economy, China is becoming more investment-driven, and the post-GFC stimulus has made the problem worse.
i.e. Fixed asset investment is growing twice as fast as retail sales off a much larger base.
3. China's exports are in a hole and cannot recover until US and European consumption recovers.

Adam S said...

Some other facts and figures from the AFR today:

Real GDP growth, year on year (%) for 2009:

China 8.9%
India 7.9%

India's inflation is worrying, but they can grow faster than it for the time being. Australia was one of the only other countries on the list published that grew even slightly last year.

carbonsink said...

Sure but 95% of that 8.9% was fixed asset investment. In other words, state-owned banks lending to state owned enterprises run by party officials to build railways, shopping malls, apartment buildings and the like.

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