Tuesday, 29 November 2011

The Economy: What's hot and what's not

The data flow today sits nicely with the RBA moving to cut interest rates at its Board meeting next Tuesday. Most likely is a 25 basis point cut to 4.25%.

The private CAPEX data were nice and strong, confirming another 3 month increment of an unprecedented surge in mining and related investment. This strength has been well documented meaning the 12.3% rise in business investment in the September quarter is no real surprise to the market or indeed the RBA. It could be argued that these sorts of CAPEX results are why the interest rate cutting cycle is starting at 4.75% and not a whole lot lower. It’s also a reason why fiscal constraint is so important. The business investment climate remains hugely positive – the pipeline of investment is huge and will take many years to exhaust.

Which brings us to the other data today.

House price trends remain disconcerting. Capital city house prices fell a further 0.5% in October and are now down 4.0% since the start of 2011. While this remains miles away from the falls seen in countries such as the US, Ireland, Spain and the UK, the economic and banking fall out from collapsing house prices is something that no one wants to see.

If house prices fall much more in Australia, those with negative equity will rise, forcing banks to tighten credit, forcing consumers into distressed sales, forcing spending to retreat. Look to the US and UK for the effects on banks and consumers on falling house prices. It is extremely bad.

The RBA credit data – one of the top 3 or 4 variables in any monetary policy decision – shows a new fresh record low (34 years of data) in annual growth in housing credit. Personal credit also fell again while business credit remains weak. In simple terms, it seems that borrowers don’t want to borrow much and the lenders seem to be limiting their lending. This is a sure sign of softer growth and on-going disinflation. The credit data by themselves are screaming lower rates.

Let’s see how the retail trade and building approvals data go tomorrow for a bit more news on the economy into the December quarter which may at the margin influence the final recommendation of the RBA Board.

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