Pointing to China, Reserve Bank gives relief to battlers

Greece's Golden Dawn Party gives out
groceries to battlers in the street.

After months of patient waiting, for many Australians, the Reserve Bank yesterday finally dropped the cash rate by 25 basis points, to 3.25 percent. For some it might seem to be "about time". Among these can be counted your usual highly leveraged mortgage holders, the real estate industry and retailers. In a story on its website, The Australian also quoted unionists keen to see more activity in the economy. There are a lot of involved stakeholders when it comes to setting interest rates. The story quotes Solomon Lew, the chairman of Just Jeans parent company Premier Investments, pushing for more cuts:

"We need to stimulate consumer and business confidence to buy and invest; therefore I hope that we see a further lowering of official rates before Christmas," Mr Lew said.

"Every week we are seeing businesses in the non-mining sector in trouble and failing; certainly retail is confronting as challenging an environment as I have seen . . . A key factor has been the Reserve Bank's failure to manage the mining boom and the consequent impact on retail, services and manufacturing."

The RBA's move yesterday saw the Australian dollar fall slightly against the greenback, but only by a mere cent. As Ross Garnaut said on Lateline on Monday night, it is a high Australian dollar that is hurting high value manufacturers here, the stakeholders our union leaders are most keen to see selling and producing more so that they can employ more Australians in their factories. More downward pressure on the exchange rate might lead to more activity in this sector, as the commodities sector gradually retreats over the next couple of years.

The All Ordinaries index bumped upward a little following yesterday's announcement, but it was up over the previous day anyway. It closed just over one percent higher for the day. The All Ords has been tracking fairly flat for a long time relative to highs experienced in 2010 and 2011. Europe's economic crisis and recession and slow-as-treacle growth in the US have worked for years to hold back the Australian stock market, which remains bearish. Unfavourable news tends to result in an immediate sharp drop, and good news is treated with a great deal of caution. The All Ords is sitting at about 4400, and is struggling to regain the 4500 point it held just prior to the momentous Greek election result back in May. Given the RBA's cut it could plausibly be at 5000 by the end of the year but that's a long way away in market terms.

It wasn't Europe's malaise that tipped the balance for the RBA this month, but rather the slowdown in China. Real estate industry stakeholders might say the RBA wanted to give homeowners a break after seeing two years of slow depreciation in the value of their properties. Retailers might say that the RBA wanted to bolster domestic spending. Unionists might say that the RBA wanted to drag down the exchange rate in order to give confidence to hard-hit Australian manufacturers. But the truth is that China is our biggest trading partner. A carefully-managed deceleration taking place in that country, plus lower commmodities prices, has led to the almost unthinkable in Australia: job losses in our mining industry. That's the spur for the RBA and we should not forget it. As Michael Pascoe noted in the Sydney Morning Herald:

The balance was tipped by a softer Asian outlook: “Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”

There might be another rate cut this year but I doubt it. The RBA is usually very conservative in the way it operates its sole economic lever, and though some might panic a bit contemplating the softer outlook suggested by this latest cut the fundamentals are strong; a mere blip in the exchange rate tells us that international investors remain relatively bullish on Australia. Overall things are looking pretty good so Labor's economic managers should smile to see how their performance is tracking against market indicators. To see how bad things can get given negative economic growth and the feeling of powerlessness it generates just look at the growth in popularity of Golden Dawn, the fascist party, in Greece. Uniformed vigilantes harrass people with dark skin and action groups give out groceries in the streets to struggling Greek consumers. It's a kind of European version of Hezbollah, taking its policies direct to the people. When people feel that the system has abandoned them they seek ways to directly influence their environment, and Golden Dawn has picked up on this growing need. They've even opened a branch in Australia.