Australia Reserve Bank "shocked" by the severity of the slowdown

The Age is reporting Australia's Reserve Bank says it's worried.

Australia's Reserve Bank has expressed deep concern about Australia's economic outlook, presenting forecasts that suggest it might have lifted interest rates too high. Its latest quarterly statement predicts that economic growth is about to slow and that unemployment will climb to 6%.

The Reserve Bank warns that, while these are its central forecasts, and headline inflation is now expected to peak at 5% in December, any further deterioration in the global outlook could lead to a "significant deterioration" beyond those forecasts.

The RBA predicts that Australia's annual rate of jobs growth, at present 2.3%, will slow to three-quarters of 1% almost straight away. The forecast implies a jump in unemployment from 4.3% to 6% by the end of next year.

Westpac chief economist Bill Evans said the Reserve Bank seemed to be "shocked" by the severity of the slowdown that it had helped engineer.

My Comment: Over-tightening is not the cause of this slowdown. A global credit bust caused by too loose lending standards and monetary policies everywhere, fueled by monetary printing in China and India is the actual cause of this slowdown. The credit boom was unsustainable and eventually had to die regardless of interest rate policy.

The bank raised its inflation forecast, saying it now expects the headline rate to peak at 5% in December before easing to 3% by mid-2010. But this would not stop it cutting interest rates, saying that, so long as the economy remained subdued, the scope for rate cuts was "increasing".

My Comment: Notice how one-sided policy always is. Central bankers do not want to try and stop credit booms from happening, instead they attempt to prolong them when they go bust.

The bank is expected to cut its cash rate by 0.25% when its board meets on September 2, the first such cut for seven years. A member of the Reserve Bank board, former Woolworths chief Roger Corbett, told Sky News yesterday that Australia was "resilient" and had a strong, broad base.

Australia's Strong Broad Base

Inquiring minds who think Australia has a strong, broad base may wish to consider what Bernanke said just a few short years ago: There's No Housing Bubble to Go Bust.

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

Wakeup Call For Roger Corbett

I have an important personal message for Roger Corbett: "Don't mistake a drunken credit binge of epic proportions for strong economic fundamentals. If you do, in a couple of years you will look as foolish as Bernanake does now."

Steve Keen vs. Roger Corbett

This one is simply no contest. Associate Professor Steve Keen from the University of Western Sydney says Brace yourselves for recession in this interview with Phillip Lasker.

Steve Keen from the University of Western Sydney has been a long-time critic of the Reserve Bank. Some analysts say the weaker economy puts interest rate cuts on the agenda when the bank meets tomorrow, but Steve Keen says it is too late.

PHILLIP LASKER: What is it in particular that makes you feel recession is a certainty? Is it simply those retail sales figures?

STEVE KEEN: No, they're the first, if you like, the first swallow of a depression, virtually that I saw coming some time ago. Because we've been spending so much borrowed money for so long, that the momentum of borrowed money has been driving the apparent prosperity in the economy.

Now you simply can't keep on doing that forever. We seem to be finally reaching the point where people are slowing down the level of borrowing, it's dropped from as much as $30 billion extra debt in 1 month down to $5 billion in the last lot of figures.

PHILLIP LASKER: What about the resources boom?

STEVE KEEN: The resources boom is a major factor but as Gerrard Minack makes the point quite frequently it only employs about 3 per cent of the population.

It does gives us an enormous amount of largesse; heaven knows where we'd be without the minerals boom coming in, but it is not enough to prevents the turn around of the scale 1 quarter of a trillion dollars in spending.

PHILLIP LASKER: Some analysts say the major difference here is that there's no stock. We don't have the supply of homes here in Australia like in the United States so we're in the going to see that crash in property prices that we saw in the United States.

STEVE KEEN: That's the old supply and demand argument, the favourite harbinger of every economist except me. To me where the demand comes from is people's willingness to borrow money to buy an asset. And that reflects their expectation that the price of the asset rising.

I think something of the orders of 40 per cent of prices are simply financed by people's expectations that the prices will keep on rising. Well when this expectation goes, ultimately goodbye 40 per cent of the current price of houses.

PHILLIP LASKER: What are we going to see in the near future that would suggest you're correct?

STEVE KEEN: Further falls in retail sales, more collapses of companies which focus upon the high-end in the retail chain; in that sense, and in its own strange way, Starbucks was an obvious candidate.

Nobody wants to buy the caramel flavoured lattes any more. So the high end retailers are likely to be the first one's to suffer. And anyone of course who's got any financial fragility behind them will go, because a major part of this downturn isn't just people stopping spending its banks no longer renewing loans.

And they will cease rolling over loans of fragile companies, and they will be the ones that explode.

Different Continent, Same Game

It appears Australia is now in the same Peak Credit game as the US and UK. 40% housing declines are just around the corner. And with that in mind, it's no wonder that caramel flavoured lattes are out (see Starbucks closes 61 stores in Australia) for proof. Indeed, evidence is stacking up that The Future Is Frugality, even down under.

Australia, welcome to the "Frugality Club" you earned your admission.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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