18/05/2011 - 08:55

Two-speed economy's division widens

18/05/2011 - 08:55

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Australia might have a two-speed economy today, but when interest rates rise again next month only one half will be moving. The other half will be dead.

Two-speed economy's division widens

Australia might have a two-speed economy today, but when interest rates rise again next month only one half will be moving. The other half will be dead.

Capital investment in mining, driven by global commodity demand, will keep business ticking over in the parts of the economy exposed to resources.

Those parts of the economy dependent on consumer spending and property investment will grind to a halt - if they have not already stopped.

Anyone from Perth who has visited Sydney or Melbourne in the past few months has not been able to overlook the difference in mood between cities riding high on resources and cities which have been hit by a severe downturn.

Media boss, Kerry Stokes, is one man who knows first-hand the difference between the near-boom conditions in resources and the near-bust conditions elsewhere.

On Monday, he told the Prime Minister, Julia Gillard, in a fascinating face-to-face confrontation, that Australia faced the risk of a "major downturn".

Gillard rejected that assertion, but it's unlikely that anyone would accept Gillard's view over that of Stokes for the simple reason that one of them knows how to run a business, the other hasn't got a clue.

Stokes is also in the unique position among Australian business leaders in having a foot in both camps. He sees on a daily basis the figures from a resource-exposed business, sales posted by Westrac which sells Caterpillar mining equipment, and advertising sales posted by his television and newspaper interests.

If Stokes smells the risk of a downturn ahead then it would be unwise to ignore his advice, especially if the Reserve Bank of Australia pulls the trigger on interest rates again next month and adds another 0.25 per cent to the cost of money - an event seen by some experts as a certainty.

Adam Carr, an economist with the independent research company, ICAP, has no doubt about interest rates being ratcheted up in June or July.

"I don't think it could possibly have made things any clearer," Carr wrote in a note to clients on the RBA's intentions. "Rates are going up, and probably soon".

To support his argument, Carr de-coded the RBA's official language used in the minutes of its latest meeting, especially these words: "higher interest rates were likely to be required at some point".

Carr noted that whenever the RBA used that phrase: "it has followed through with a rate hike either at the next meeting (June), or the one after (July)."

If Carr is right he has added fuel to the argument mounted by Stokes in his polite verbal stoush with Gillard who sounded supremely ignorant of the damage already inflicted on large sections of the economy by the high value of the Australian dollar, in combination with higher interest rates.

The dollar alone has dealt near-fatal blows to parts of the tourism, manufacturing and education industries. High interest rates have crushed the property and retail sectors, with talk of more to come already adding to the slowdown.

What Gillard, and her Canberra-based advisers appear to be seeing are official Treasury and Reserve Bank numbers which show the Australian economy performing relatively well, but at risk of importing the high rates of inflation being experienced in China.

The problem with Canberra's numbers is that they are an amalgam of good news flowing in from the resources sector, which directly employs very few people, with the bad news from the sectors which are major employers.

The response, which is totally focused on crushing any sustained outbreak of inflation, is to use the interest-rate sledge-hammer to crush consumers while resource investment forges ahead.

For WA this is not such a bad situation for its big mining sector. For anyone not exposed to mining it is a horrible outlook, and one which Stokes obviously sees very clearly.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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