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Business Outlook, 21 October 2010

by David Robertson, Head of Financial Markets, Bendigo and Adelaide Bank Limited

The domestic economy has continued to grow at a steady pace over the last quarter, with the jobs market in good shape, the stock market continuing its gradual recovery, and the export sector (despite the high Aussie dollar) contributing to a record trade balance (as a share of GDP).

The jobs market has managed to exceed predictions for some time now, and over the last twelve months the average increase in employment has been over 30,000 jobs per month. Our unemployment rate at 5.1% is the lowest of most countries around the world. Interestingly the resource rich states of WA and Queensland are outperforming in terms of employment growth, and while the other states are not vastly inferior, the reality of a two-speed economy for the Reserve Bank presents a range of challenges.

As noted in the recent RBA Board meeting, when the central bank elected to leave rates on hold, high commodity prices and the strength in our resources sector is delivering a large rise in Australia’s terms of trade, which is a significant boost to national income, however more broadly uncertainty in a range of markets and the ‘legacy of the financial crisis’ means conditions vary greatly from segment to segment.

The decision to keep rates on hold was a surprise to the market given how strong the hints had been from the RBA about the inflationary risks that persist and the relative strength of our economy over many other regions, although the latest jobs data suggests the next interest rate increase is still imminent. Perhaps the high Aussie dollar was the main factor in delaying the rate rise, and having hit a fresh record (post float) high of 1.0003 last week, there are calls from some areas to attempt to weaken the AUD - perhaps missing the point that currencies float via supply and demand based on their merits, and in general a strong currency is indicative of a strong, enticing economy.

Naturally, exporters are not thrilled by record levels of the Aussie dollar, however fortunately most commodities (based in USD) are also trading at high levels, and the latest ABARE forecast on farm exports predicts a 10% increase on last financial year.

The housing sector is a hot topic at present - at face value the fall in auction clearance rates and the levelling off of housing values and loan approvals are concerning, however rather than the start of a ‘bubble’ it is far more likely that we are simply seeing a welcome slowing in the housing market, to a more sustainable growth rate.

Overseas our major trading partners in China and East Asia are also experiencing a levelling off in their post GFC growth rates, all of which points to a more gradual and extended period of expansion for Australia, with our GDP growth forecast to be slightly higher at 4% per annum next year. 

The contrast between this outcome and the latest developments in the US, UK and Europe is stark, where authorities are still working through how best to engineer some form of economic expansion. In the US the likely approach to engineering the recovery is another round of ‘quantitative easing’, where the Federal Reserve will effectively increase the supply of money (and its balance sheet) and put this ‘created’ money to work by buying a range of assets in its open market operations. This activity may well be effective in the short term, but does risk longer term financial structural damage. No wonder our currency is on the verge of overtaking the greenback in value.