The Reserve Bank of Australia cut its cash rate by 0.25% to 3.50% on Tuesday which was followed by positive GDP and employment numbers released on Wednesday and Thursday. Has the RBA been too hasty in cutting rates or is this justified in light of problems in Europe and slowing growth in China?
The statement released by RBA Governor Glenn Stevens based the decision on modest domestic growth, a weaker and more uncertain international environment and an outlook for inflation at the lower end of the 2–3 per cent target range. While the international environment is certainly more uncertain, the recent GDP and employment data point to more robust domestic growth. However this growth is restricted to the mining industry, meaning the higher interest rates are making life difficult for people not working in this sector.
Australia’s GDP grew 1.3% over the last quarter and 4.3% over the last year on a seasonally adjusted basis. These numbers came in well ahead of expectations of 0.6% and 3.3% respectively. While strong headlines numbers, the detail shows that Australia is indeed battling with a two tiered economy as shown in the table below.
March 2012 change in production chain volume measures
|Sector||Quarterly Change||Yearly Change|
|Agriculture, forestry and fishing||2.70%||6.40%|
|Accommodation and food services||-1.10%||1.40%|
|Transport, postal and warehousing||0.50%||2.50%|
Australia added 38,900 jobs (seasonally adjusted) in May compared to consensus expectations of no change in the number of employed. The seasonally adjusted unemployment rate declined to 5.0% from 5.1% in April. Again the detail shows it is the mining sector driving the headline numbers with unemployment in the mining states of Western Australia and Northern Territories only 3.8% and 4.0% respectively.
A few more rate cuts will be needed to revive Australia’s weak non-mining industries but strong headline GDP and employment numbers make further cuts more difficult. The inflation number will likely remain the key decider for further interest rate decisions, if it remains close to 2% and Europe’s problems continue we will likely see further rate cuts, but if it begins to climb we may see a pause in this rate cut cycle.