The latest minutes from the RBA Board meeting suggest that the RBA supports a gradual global economic recovery hypothesis and in fact notes that its economists revised their outlook for economic growth upwards. The RBA does however caution that the currently unsustainable level of fiscal deficits in many developed economies will need to be checked, potentially undermining a broader economic recovery. This is certainly something to continue monitoring. Much of the global economic recovery to date has been driven by the rebuilding of global inventory, supported by stimulus policy. Ultimately for any economic recovery to be sustainable private sector demand must grow and there is little evidence of this at the moment.
The RBA notes that gradual global economic recovery is not leading to stronger inflation. Core inflation measures are falling in many developed countries due to excess economic capacity.
In Asia (ex-Japan) the situation is different and the RBA notes stronger growth, falling unemployment and increased exports and industrial production. The RBA’s views are certainly supportive of strong economic growth in developing countries and weaker growth in developed, nothing particularly new here but the RBA does note evidence of declining fixed asset investment in China, which is an important development and if it continues it may suggest the Chinese economy will avoid an asset price bubble, and subsequent collapse of the economy post bubble. Investment in the Chinese economy is particularly relevant to Australia, where investment in resource development is a major part of future economic growth.
Domestically the RBA suggests that the Australian economy is strengthening and underlying inflation is slowing.
At the household level the bank noted the rapid rise in housing prices in 2009 but suggest prices have leveled out after the winding back of higher grants to first home buyers. This is a very important point and something that the RBA will monitor very closely in making future interest rate decisions. A growing population, falling unemployment, weak private sector investment (particularly residential construction) and liberal bank lending at the household level are the ingredients for a housing bubble in Australia.
Business conditions while firm are not supported by increased lending and the RBA once again discussed weakness in the flow of finance to the business sector. This weakness reflects both a desire by banks to de-risk their lending books and corporates to reduce their gearing. Neither are supportive of longer term economic growth or investment. Which begs the question, if banks are happily lending to households for residential mortgages but not to housing construction firms what will happen to housing prices? On a side note our research team recently attended a meeting at which Ralph Norris, the CEO of CBA, commented that in 2009 the Commonwealth bank grew its mortgage lending book faster than it ever has before.
Similarly if corporates are not borrowing and yet there is a substantial increase in investment in the resource sector then which non-resource projects are suffering from the lack of capital and how will this shape the Australian economy in the next 10 – 20 years?
Given further evidence of recovery in the Australian economy and pressure in the housing market we thought that the RBA’s decision to hold rates in February was surprising. Perhaps we are misjudging the potential for a housing market bubble (particularly as we understand that mortgage rate spreads are not only high but have grown and not contracted since the RBA began to raise rates in October 2009). We suspect that the continued evidence of economic recovery in Aus will lead to the RBA lifting rates again in March by 0.25. We are still targeting a cash rate level of approx. 5.25% by the end of 2010.
To read the latest minutes of the RBA Board in full click here
View disclaimer