The Australian economy is akin to a game of tug-of-war. On one side, and pulling hard, is the recent economic data. This data, ranging from corporate earnings to new dwelling construction, has been soft. At the same time, on the other side and pulling a little belatedly, is the RBA with its promises of future rate cuts. In the middle sits a slightly battered Australian economy, with confidence and certainty wavering.

Who will win?

A key battleground is the housing market. This is key to consumer confidence and, in turn, stimulating wider economic activity. It is fair to say, despite some early promise, that lower mortgage rates are yet to really kick-start the housing market. This is despite the cash rate being only 25 basis points higher than the emergency lows seen in 2009. In addition, corporate outlook statements, from industries as diverse as building materials to waste removal, have in the last month really highlighted how hard it will be to see strong growth in corporate earnings this year.

On the plus side, employment has remained resilient. Corporate balance sheets are also robust, with good cash balances. Inflation is also within the RBA’s target band. Chinese growth is also showing tentative signs of accelerating again, with manufacturing at five month highs.

Given this support, at some point rates should be low enough to encourage consumers and corporates to start spending again. Given that the consumer represents at least 70% of the Australian economy, this will be significant, and keenly anticipated.

Marc Whittaker

Portfolio Manager