As the world waits to see what effect recent events in China and Greece might have on our vastly inter-connected global economy, local and overseas analysts consider the potential impact on future interest rate decisions here at home.
After the RBA confirmed that the official cash rate would again remain unchanged at 2.00 per cent for July, talk immediately turned to future monetary policymaking prospects for the remainder of 2015; as the central bank works to keep Australia’s somewhat vague fiscal fortunes stable in the face of this latest economic upheaval.
No change for now
In a statement regarding their July decision, governor Glenn Stevens said, “Information on economic and financial conditions to be received over the period ahead will inform the board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”
Essentially the Board is doing much the same as everyone else; waiting to see what the fallout might be as two sizeable and dare I say it, ‘unprecedented’ economic occurrences play out overseas, in two very different scenarios.
It’s almost like tuning in for your favourite daily soap opera fix to see how the (generally drawn out) storyline unfolds…only this is real life and the potential repercussions of all the drama a lot more serious.
“Despite fluctuations in markets associated with the respective developments in China and Greece,” says Stevens, “Long term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low.”
In other words…it doesn’t look like our financial sector will be too badly buffeted by the ripples casting their way outwards from Greece and China at this stage, but it’s really too soon to tell.
Big trouble in not-so-little China
It’s not like this is new ground for Stevens…whose no doubt become accustomed to navigating unchartered waters whilst trying to find an interest rate safe haven for Australia’s economy.
But as is the case with all ‘unprecedented’ economic shifts (think 2008 GFC), including these current occurrences across two highly influential and diverse markets, you have to wonder: what will the fallout be?
If the current stream of Chinese sharemarket losses continues unabated, analysts fear the country’s entire economic growth could be stunted as consumer confidence plummets alongside stock prices.
Given Australia is so closely tied to China’s economic fortunes through our trade association with the Asian manufacturing juggernaut, this is certainly a concern for local investors.
Not to mention what might happen if the glut of Chinese investors who’ve bought into residential real estate across our major capital cities were to suddenly pull the pin due to a change in circumstances, such as losing a large sum of invested money.
The impact on iron ore prices was virtually immediate, leading experts to suggest that if this becomes worse case scenario for China, Australia’s employment levels and overall confidence could slip into the economic abyss the world’s new superpower could leave in its wake.
Will all of these factors combine to force the Reserve’s hand? Some believe this will be the case, and are banking on a further rate cut before 2016.
What the experts say
“Even though the RBA decided to leave interest rates on hold at 2 per cent for the second month in a row, and did not provide a clear hint that more cuts lie ahead, we still think that a further weakening in the outlook will prompt it to reduce rates to 1.5 per cent by December,” said Capital Economics’ chief economist for Australia and New Zealand Paul Dales.
Begging to differ (but only slightly mind you) was, among others, Westpac chief economist Bill Evans.
Evans and fellow optimistic forecasters are of the opinion that interest rates have eased sufficiently, although uncertain variables might force the RBA’s hand.
“Westpac’s current view is that rates will remain on hold through both 2015 and 2016,” said Evans. “However, the risks are clearly to the downside and will be dependent upon the bank’s confidence in the outlook for the unemployment rate and economic growth.”
The 2015 BusinessDay Economic survey invited a veritable ‘who’s who’ panel of globally recognised economic experts and academia to comment on Australia’s economic and interest rate outlook.
None of the forecasting panel expects a recession this coming year, but feel Australia’s terms of trade will continue to drop and wage growth will be so low it won’t match inflation, sending real wages backwards.
The outlook for property markets was sunnier however, with values expected to climb for at least another year. And while business investment is set to slide further, unemployment is anticipated to hold steady.
Ominously for Abbot and co, the general consensus is that the budget deficit will be worse than initially calculated, and that the falling Aussie dollar might prompt a possible further reduction in interest rates over coming months.
More likely though, according to panel consensus, is that the cash rate will remain steady, along with the general status quo.
“It’ll be 2014-15 all over again,” stated the report. “Another year of drifting, without much of an economic or budget recovery.”
Property continues to prop us up
The panel says housing is really the only bright spot in an otherwise bleak outlook for Australia, in the short term at least.
Collectively, industry heavyweights predict acceleration in growth to 7.5 per cent for the overall real estate sector, with Sydney house prices expected to surge a further 10.3 per cent in 2015-16 and Melbourne by a more modest 6.4 per cent.
And what do the experts make of all the housing bubble banter? Well it seems most agree that the hot air will be let out of our currently buoyant inner city markets in a slow, flatlining manner, not an earth-shattering pop!