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Now, the slowdown is here

THE slowdown is finally here!

For almost three years, forecasters have been predicting a reduction in growth in the Australian economy. Yet the economy has continued its strong performance with GDP growth of around 4 per cent to 4.5 per cent each year.

This year commenced with forecasters being reasonably optimistic and suggesting that a 4 per cent growth rate would be underpinned by the Olympic games to be held in Sydney in September.

At the same time there were suggestions of a slight slowdown towards the latter half of this financial year. The retail sales figures for January, recently released, confirmed the possibility of a slowdown in the economy.

At a time when an increase in retail sales could be expected, with post-Christmas sales being the order of the day, the figures

indicated a slowdown of around 0.4 per cent for the month.

This is the first economic data that suggests our economy could well have peaked in the latter half of last year.

The sharemarket appears to have taken the view that the pressure on the Reserve Bank of Australia to raise interest rates at their next meeting was now removed.

Accordingly, the market reacted very positively and the All Ordinaries Index has had a healthy rise to new record levels in a short space of time.

As this phenomenon was manifesting on the sharemarket, we also saw currency traders mark down the Australian dollar to levels not seen in the last nine or ten months.

The reality of economic policy came to the fore with competing pressures being placed on the RBA.

On the one hand, we have an Australian dollar that needs to see an interest rate rise to shore it up. On the other, the economy is going into a declining path. This would call for no interest rate rise.

In the past, the RBA has shown that it doesn’t generally use the interest rate mechanism to shore up the dollar unless the decline is substantial and quick. This particular decline is neither of those.

So, on the balance of probabilities, it would seem that the likely outcome of the meeting would be to leave the monetary policy settings as they are right now.

To some extent, the last rise of 0.5 per cent was preemptive as it occurred before these retail sales figures had come through. I consider that it is therefore unlikely the Reserve Bank will raise rates next week.

l Economist Suresh Rajan is a director and proper authority holder with Smith Martis Cork and Rajan – financial planners.

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