Soft data should not stand in the way of a rate rise from RBA


A batch of data suggesting sluggish economic growth in the December quarter will not make much difference to the Reserve Bank of Australia’s interest rate decision on Tuesday.

Until the release of business indicators and balance of payments figures by the Australian Bureau of Statistics (ABS) on Monday, economists had been looking forward to news on Wednesday, in the bureau’s national accounts that the economy ended 2009 with a bang.

The median forecast by an AAP survey was growth of 0.9 per cent for seasonal and inflation adjusted gross domestic product (GDP) for the December quarter.

It would have been the fastest quarterly growth rate since the first half of 2008, before the wheels fell off the global economy.

The new figures on Monday cast doubt on those rosy expectations.

The biggest hit to quarterly GDP, the bottom line of the national accounts due on Wednesday, was a hefty subtraction of 1.3 percentage points from foreign trade.

Business inventories rose by 0.2 per cent in the quarter after expanding by 0.1 per cent the previous quarter, adding marginally – about one twentieth of a percentage point – to GDP growth in the December quarter.

The inventories and trade figures slot into the expenditure-based measure of GDP.

There are some positives to balance them – figures already released show retail trade rose by 1.1 per cent in the quarter, while private sector capital spending rose by 5.5 per cent.

And government spending data due from the ABS on Tuesday should show a positive effect on growth in the quarter.

But the latest numbers certainly throw cold water over expectations of a very strong rise in GDP in the quarter.

Those figures all feed into the expenditure-based measure of GDP.

But the numbers were fairly modest on the income side of the national accounts as well.

The sum of corporate and unincorporated business profits and aggregate wages, which are not adjusted for price changes, posted a seasonally adjusted rise of about 1.4 per cent.

That allows for an inventory valuation adjustment to bring the corporate profits component into line with the corresponding component of GDP.

Australia’s terms of trade, the ratio of export prices to import prices, rose by 2.9 per cent in the quarter.

That means the price of what Australia produced rose faster than the price of what it bought in the quarter.

And the price measures used to derive a real-term estimate of GDP are based on the price of what Australia produces.

That means the income measure of GDP may look very weak once it is adjusted for inflation and expressed in real terms.

But that prospect will not sway the RBA if it had already formed the view that another interest rate rise is needed.

For a start, its own forecasts published last month show GDP rising by two per cent though 2009.

A rise of 0.9 per cent in the December quarter would lift the annual rate to 2.3 per cent, barring revisions to earlier estimates.

A rise of, say, 0.6 per cent, would put GDP right in line with the official forecasts – hardly reason to back away from the interest rate increases that form a key assumption underpinning those same forecasts.

Even a softer result than that would have less impact on policymakers than might be supposed.

The reason is that the RBA is not looking out the rear-vision mirror wile driving the economy.

And the view through the front windscreen shows a major surge in mining investment not far ahead.

Ultimately, the survey of business capital spending intentions for the remainder of 2009/10 and 2010/11 published by the ABS last week should prove to have a bigger effect on monetary policy than GDP growth in the national accounts.

After guessing wrongly last month, when the RBA left the cash rate at 3.75 per cent, economists and traders are cautious this time.

Even so, they give a rate hike, to 4.0 per cent, a better than even chance, and rightly so – even after the soft-looking data released on Monday.


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