Tuesday, June 04, 2013

Why the Reserve should probably cut, and why it probably won't

Decision here at 14301 AEST

Job advertisements have plunged to their lowest point since the global financial crisis, wages are climbing at their slowest pace this decade and spending in shops is barely moving, but the Reserve Bank board is expected to keep interest rates on hold when it meets on Tuesday.

The Bank believes the lower Australian dollar will help boost the economy in much the same way as would have happened had it cut rates.

When the board last met on May 7 it cost 102 US cents to buy an Australian dollar. It now costs close to 96 US cents, a slide of 6 per cent. Against a broader mix of currencies the Australian dollar has slipped 4 per cent.

If sustained the cut will give Australian exporters 4 per cent more for their overseas sales than before the dollar fell and will pressure the importers who compete with them to charge 4 per cent more in Australia.

Treasury Secretary Martin Parkinson told an economists conference after the May budget that, “as a crude rule of thumb, a cut of 5 or 6 cents on the US dollar exchange rate probably boosts real gross domestic product by about a quarter of a percentage point over a year”.

Dr Parkinson is a member of the Reserve Bank board.

The ANZ’s count of job advertisements slid a further 2.4 per cent in May to be down 10 per cent since the start of the year. An average of 132,500 job advertisements were posted per week in May, well down on the average of 188,600 posted in late 2010. It is the weakest reading since the 2009 global financial crisis...

“It is a relatively moderate rate of decline, but it is one that is unfortunately likely to be consistent with a continuing moderate rise in Australia’s unemployment rate,” ANZ economist Ivan Colhoun said.

In a further sign of a softening labour market the Bureau of Statistics reported on Monday that wages grew just 0.7 per cent in the first quarter of the year after climbing 0.7 pc in the December quarter, the slowest pace since late 2009.

Company profits were up a better than expected 3 per cent in the quarter, but when mining profits were stripped out the remaining non-mining profits climbed just 0.4 per cent. Manufacturing profits slid 6.6 per cent in the quarter and 8.2 per cent over the year.

The Australian Industry Group performance of manufacturing index remained weak in May, climbing 7.1 points to 43.8 on a scale where anything less than 50 points means the sector is shrinking.

Separately-released retail sales figures showed spending growing, climbing 0.2 per cent in April after falling 0.4 per cent in March.

“After a burst in January and February sales flattened out,” said Westpac economist Matthew Hassan. “It is broadly in line with consumer confidence which began the year with a promising rally, but then faltered in April, turning negative in May.”

Spending on household goods jumped 3.8 pc in the first two months of the year, but then slipped 2.4 per cent in March and April. Spending in department stores climbed 1.3 per cent before sliding 2.3 per cent.

Spending is growing at a trend rate of 0.6 per cent per month in NSW, 0.4 per cent in Victoria and Queensland and just 0.1 per cent in Western Australia. Spending remains very strong in the Australian Capital Territory, climbing at a trend rate of 0.9 per cent per month.

RP Data reports that home prices turned down again in May, slipping 1 per cent in Sydney, 3 per cent in Melbourne and 1.3 per cent in Brisbane.

In today's Sydney Morning Herald and Age

Related Posts

. May: Why the RBA cut and will cut again

. April. It is possible for inflation to fall too low. It has.

. March: 71,500 more jobs. It isn't true, the Bureau knows it

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