Economic Indicators

By Jason Fittler,

This week the Reserve Bank kept interest rates on hold, the expectation at present is that America will look to increase their interest rates in the near future; this is positive for their economy.

With our official interest rate at 2%, you have to wonder if Monterey Policy has any further benefit to our economy.

The banks have already moved and increased interest rates two weeks ago on the back of increasing liquidity requirements which are now in place. These increase liquidity requirements also limit the amount of funds banks now have available to lend. Effectively through government legislation, we have already started to see the Australian cash rate increase. Personally, I expect that the next rate change by the Reserve Bank will be an upward move.

If we look at the latest Economic date available, I note the following:

1.    GDP is down slightly year on year but up from 2007 lows.

2.    Retail sales have been consistently growing each quarter all be it only 0.3% per quarter.

3.    Private business has started to hold more inventories.

4.    Total dwelling units commenced is down.

5.    Income from sale of goods and services by manufacturers are also down.

6.    Wages have continued to increase however at a slower rate.

7.    Unemployment has continued to increase over the past 12 months.

8.    Company gross operation profits have been decreasing each quarter over the past 18 months.

This data indicates to me that our economy is nearing a bottom, and although it may not get worse, there is no guarantee that it will rebound quickly. In fact, I expect that any recovery will be quite slow given that household debt and percentage of income used to pay the debt are at all-time highs it will take a time to unwind these positions.

With interest rates at these historically low levels Monetary Policy, I feel will have little effect on our economy. As such, I expect rates will remain low for some time while other economic indicators are looked at.

I expect that we will see the government focus on jobs that by its nature will require an input of capital by governments and by the private sector.

We are starting to hear more about increases in taxes by the Government; this should in turn translate to infrastructure spending, decreased unemployment and increase in the official cash rate. 

I expect business will be cautious not to invest too much capital during this period. Governments increasing spending will be positive for our listed companies as it will create opportunities and increase profits providing long-term growth.