Interest rates on hold

Paul Dales from Capital Economics talks about the latest RBA decision, and why he thinks GDP growth will contract

Introduction – Interest Rates Hold

Ross Greenwood: Great to have your company here on money news right around Australia. I’ll tell you a few bits and piece today, we’ve already told you about the Reserve Bank interest rates on hold, and on top of that then you’ve got this decision from the Fair Work Commission in regards to wages, for the lowest paid in our community. Well to complete if you like a trifecta of economic news tomorrow, you get the economic growth numbers out for the first quarter of this year.

A Bloomberg survey of senior economists in Australia out late this afternoon, indicates it believes, the standard adjusted quarter on quarter GDP growth in the first quarter will be 0.3%, in other words going forward year-on-year that economic growth 1.6%. That is significantly lower than what either the Reserve Bank or even the federal government in its budget, imagines that the economy will be growing.

Certainly some economists in the last little while, have been downgrading their own forecasts of just how fast the Australian economy is growing right now. Let’s go now to Paul Dales who is the chief economist of capital and economics in Australia and New Zealand, is on the line. Many thanks for your time Paul.

Interview with Paul Dales

Paul Dales: My pleasure.

Ross Greenwood: I know that you certainly have downgraded your forecasts for GDP growth in the first quarter, and yours almost reflects to a certain extent to where Bloomberg is at the upper end, but you’re also suggesting that there could be a contraction that’s occurred to the GDP?

Paul Dales: It’s right. For some time now I’ve always thought that the first quarter would be fairly weak for Australia, but in light of the most recent date releases, my calculation suggests that the economy may have even contracted in the first quarter with GDP perhaps falling by up to half a percent. That would be a weaker out-turn than most people are expecting, and it would certainly prompt people to take notice of what’s happening to the economy at the moment.

Ross Greenwood: If that were the case, and you pointed this out today in your report, that would be the second contraction for the economy in three quarters, but in the middle of those two, if you like downturns, what you’ve had is incredibly strong economic growth. It’s been a little bit all over the place. What would you see as the significant contributory factors to the economy slowing down in their period from January until March 31st?

Paul Dales: Most of it is due to the very severe weather we had in Australia in the first quarter. In certain parts of New South Wales is extremely hot at the beginning the quarter, which puts some dent into retail sales and building activity, and then towards the end of the quarter it was extremely weak with Cyclone Debbie hurtling through Queensland, which pretty much meant that a lot of shops were closed in the end of the quarter. It meant that miners couldn’t dig much coal out of the ground and ship it overseas.

In that sense, we shouldn’t get too worried or too carried away by any weak GDP figures that are released tomorrow, because some of it will be due to temporary factors that will be reversed to some extent in the second quarter. I have been looking at this for a while and in detail, and I am a bit more concerned that there are some more small sustained signs of a slowdown, particularly in the household consumption and dwellings investment. That’s the reason why I think that GDP growth in Australia this year probably won’t be much more than 2%.

Ross Greenwood: You’re saying that you won’t get very strong growth? What are the chances of Australia going in the recession over the next 12 months do you think?

Paul Dales: I think they’re probably a bit higher now than they were certainly six months ago. The big risk is that the dwellings investment which has been a great support to economy in the last few years slows incredibly sharply, that could threaten the Australian economy. If that happens at the same time that households start to think that in fact my wages aren’t rising much, I’ve got quite a lot of debt, I’ll just not spend so much at the moment, then yes the risk of recession in the next 12 months is — It’s not extremely high, but it’s certainly rising. That’s not my central view, but it is something we need to consider.

Ross Greenwood: Okay. One last one before I let you go, and that is the current account numbers out today. This is money into the country, money out of the country. Quite clearly, Australia is doing well when we’re earning more money. What it does seem at least anyway, is the goods and services accounts in surplus by a record $9.2 billion. In other words, Australia is starting to sell products to the world that are not coal, iron, or gold, or gas.

In fact these are starting to become different types of exports. Is that the way I should read that? Because it would seem to be genuinely good news for Australia, especially for say, many of the rural products that we do sell overseas.

Paul Dales: It is definitely a positive development, and most of it is due to the rapid rising commodity prices seen over the past six months. That simply meant that more money is coming into the economy than previously, and that money has to go somewhere. Some of it may end up in the pockets of households, some of it may end up in the pockets of business or government, but unfortunately at the moment, the latest indicators are that most of it is just going to go back out overseas into the pockets of miners, who are mostly owned by foreign owners.

It’s certainly a good thing, but at the moment I’ve seen very little evidence that it’s prompting businesses to spend more, or households spend more, or even the government spend more. Unless that happens, then it’s a good thing for the economy and it’s a good thing to some extent, but it’s certainly not a great thing.

Ross Greenwood: Paul Dales who is the chief Australia and New Zealand economist for capital economics. Always great with his time here on money news, and Paul we appreciate it this evening.

Paul Dales: Thank you very much.

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