About a month ago, just ahead of the Reserve Bank of Australia’s (RBA) last regularly scheduled meeting, the Australian Bureau of Statistics reported that second-quarter gross domestic product (GDP) in the Land Down Under grew 1.2 percent quarter over quarter.
At a 4.8 percent annualized pace, growth for the three months ended Jun. 30 was the fastest since the first quarter of 2007, driven primarily by recovery from natural disasters in Australia’s northeast. And growth was 1.4 percent from Ju1. 1, 2010, to Jun. 30, 2011, double a consensus year-over-year estimate of 0.7 percent.
Flooding and cyclones hampered the first quarter, when Australia shrank by 0.9 percent, a figure that was revised upward from a previous estimate of 1.1 percent negative growth and an original estimate of minus 1.2 percent. Exports fell 8.7 percent, the largest quarterly decline in 37 years, as coal, iron ore and agriculture production was hampered by Mother Nature.
The second-quarter rebound was broad based, as consumer spending grew 1 percent, adding 0.5 percentage points GDP growth; investment in machinery and equipment grew 4.9 percent, adding 0.3 points; and exports rose 2.6 percent, adding 0.6 points.
In addition to an inflation rate well within its 2 to 3 percent target, the RBA had plenty to consider–Australia continues to enjoy record-high terms of trade, an unemployment rate near 5 percent, a relatively stable financial system and an enviable sovereign debt position–when it met Tuesday (Sydney time) to once again consider interest-rate policy.
Australia: A Central Bank’s Dilemma
A lot has happened over the past four weeks. But not much has changed. The basic situation the RBA faced a month ago is a lot like the one it takes up this week.
As of this writing a solution to the Greek debt crisis is still agonizingly elusive, with new budget-target failures putting the whole effort to question and drawing fresh scrutiny to the next dominoes, theoretically Ireland and Portugal, perhaps Spain and Italy, too.
Alongside this threat stands the equally ugly specter of US economic stagnation. A poisonous Washington, DC, political environment, where monetary policy is nearly exhausted and any attempt at fiscal stimulus is likely DOA until after the November 2012 presidential election, won’t help matters.
Volatile markets reflect fears of another 2008-style systemic meltdown, a collapse of economy and finance alike. But there are crucial differences, however, between then and now.
First, we know where the landmines are buried. Markets are well aware of the risks involved with the various sovereign credits. Exposure of institutions to suspect debt is well known, quite unlike the situation that led to the unraveling of the global financial system, namely an unregulated, unlisted market of credit default swaps that dwarfed in nominal value the assets upon which they were based.
Second the private sector is well capitalized, prepared to privately stimulate domestic economies. In the still-critical US, for example, company balance sheets are in very good shape: According to Capital Economics internal funds available to non-financial corporate business stand at a 30-year high of 9.9 percent of GDP. Liquid assets are at 7.3 percent of GDP, the highest level in more than 50 years.
Companies have cash ready to deploy largely because they’ve been able to refinance existing debt and/or lock in new capital at record-low costs over the last several years. There can be no “crisis” for companies that don’t have the need to immediately access credit markets.
Third, we have the benefit of hindsight. Policymakers in key jurisdictions have seen the consequences of market-shaking developments such as surrounded the Lehman Brothers implosion.
Where bad policy choices all result in pain for taxpayers, either through new levies or lost jobs, the tendency toward conserving the euro, organizing a centralized revenue authority, thrusting upon Germany an unfair burden, as opposed to letting the whole system come apart, is likely to win out. Hopefully in the US the weight of the private capital situation cited above will overcome DC inertia.
Finally, economic data–in Australia, the US, China and around the world–continue to be lumpy and inconsistent but far from definitive on the question of recession, double-dip or otherwise.
For example, the US Purchasing Managers Index (PMI) crept up to 51.6 in September from 50.6 in August, beating the consensus forecast of 50.5. Readings above 50 on the PMI generally indicate “expansion,” while readings below 50 indicate “contraction.” The production component, which measured a contracting 48.6 in August, reversed to an expanding 51.2 in September, the primary driver of the upside surprise.
In China the official PMI reading released by the National Bureau of Statistics appears to have stabilized, rising for the second consecutive month, to 51.2 in September from 50.9 in August. New orders, a proxy for global demand for Chinese goods, registered a 50.9 reading, reversing a 48.3 for August.
That’s still below the historical average of 55.7, suggesting global demand remains fragile. So do PMI data from Taiwan (to 44.5 in September from 45.2 in August), India (50.4 from 52.6) and Japan (49.3 from 51.9).
Australia: The Resource Difference
The RBA, facing different economic terrain than most of the developed world, was the first to tighten borrowing rates in the aftermath of the global recession. But Australia never sank into recession from 2007 to 2009, one of the few economies defined by the International Monetary Fund (IMF) as “advanced” not to do so.
From October 2009 to November 2010 the RBA increased its target “cash rate”–what it calls its interest rate on overnight funds–by 175 basis points in an effort to cool rising domestic consumption. The cash rate now stands at 4.75 percent, the highest such rate in the developed world. The US Federal Reserve’s fed funds rate is currently “zero to 1/4 percent,” as low as it can go, while the Bank of Canada’s (BoC) benchmark stands at 1.25 percent.
The Fed, at the same time it announced a new plan to keep long-term interest rates suppressed, “Operation Twise,” reiterated on Sept. 21 that it will keep the fed funds rate near the lower bound until 2013. The BoC’s policy stance softened in its last statement; it held its rate steady during its last meeting Sept. 7 but suggested its next round of tightening is now much further in the future.
It’s important to note that that the RBA has significant room to employ traditional monetary policy tools–i.e., interest-rate cuts–to stimulate the domestic economy should conditions in the US and Europe deteriorate. And with a debt-to-GDP ratio in single digits the Australian government has ample capacity to fund fiscal stimuli, as it did in 2008 and 2009. The question remains whether the RBA or the Australian government will find it necessary to exercise these relative strengths anytime soon.The Australian Bureau of Statistics provided another appropriate frame for an RBA meeting, as it reported Tuesday morning (Sydney time) that demand from Asia for metal ores and minerals pushed Australia’s seasonally adjusted trade surplus to AUD3.1 billion in August, it highest level since June 2010 and up from AUD1.8 billion in July. Imports also grew 3 percent, suggesting rumors of the Australian consumer’s demise may have been greatly exaggerated.