The Chinese Manufacturing PMI Index fell to 48.1 points – locking in 5 straight months of contraction. It is not good news for Australia’s largest export market to be showing signs of such an abrupt cooling in activity. Little wonder the Australian dollar fell sharply in reaction to this news and interest rate futures priced in a little more in the way of interest rate cuts in the next 6 to 12 months.
In Australia, 2012 started with snippets of economic news showing generally weaker activity, downside global risks and ongoing low inflation.
Australian markets were pricing in a further rate cuts, with a rate around 3% priced in for the middle to latter part of 2012. The cash rate stands now at 4.25%.
Since then, the economy news has tended to deteriorate. GDP growth has stalled at a pace well below trend; employment is flat at best; consumer sentiment has weakened and house prices continue to ease. About the only good news has been confirmation of the ongoing boom in business investment which is driven in large part by the mining boom.
From overseas, the recession in Europe is unfolding broadly as expected, although very recent news suggests it is no worse than feared. At the same time, the news from the US has been noticeably more favourable with signs of a turn in housing, a run of solid jobs reports and share prices have been moving higher. This is good news. It is a very different story from China where the economic news has been unambiguously pointing to softness with a downgrade of the government’s growth target, weakness in manufacturing and a stalling in demand and prices for some commodities.
As discussed previously, the RBA needs to be more realistic about the current performance of the economy and the risks in the outlook. It needs to take monetary policy to a more accommodative stance. The April meeting of the RBA Board presents an opportunity for rates to be cut. A balanced view of the economy suggests a rate cut should be certain, especially as the RBA failed to act in February and March and the news since then has been quite poor. But it is not clear whether the RBA can divert is gaze from the mining boom and look at the rest of the economy and move rates lower. We'll see in a couple of weeks.