The timing could not be any worse.
A big week for the Australian economy lies ahead – there’s no doubting the impact the COVID-19 virus will have on markets and the economy, as the first of two surveys of Chinese manufacturing showed on the weekend with a big plunge in February.
It was terrible reading, a record fall as activity in the huge Chinese manufacturing sector all but halted. Activity fell at a record pace last month and it will force the RBA to consider the prospects of an interest rate sooner than they have wanted.
That equates to a deep recession.
There’s another survey today which will show something similar. If that’s the case then a rate cut here looms large with some economists wondering if growth in the Chinese economy has slumped, perhaps dipped into a contraction in the current first quarter of 2020.
That means even more scrutiny of tomorrow’s Reserve Bank decision tomorrow. Then there’s the December quarter GDP figures in the national accounts on Wednesday, plus the start of month data on retail sales, building approvals, house prices, trade and car sales (See Diary).
AMP chief economist, Shane Oliver says the RBA “should be cutting interest rates again on Tuesday in the face of the threat to the economic outlook from coronavirus, but it’s a very close call as to whether it cuts now or waits till the April meeting. The reasons the RBA should be cutting now are simple.”
Many other economists feel the same, but some less reactive analysts point out that the central bank will probably leave rates steady while it waits for clearer evidence about the impact on the economy from the COVID-19 virus.
The federal budget surplus is vanishing. The federal government’s latest monthly financial statement for January last Friday showed the underlying cash balance at a $26.6 billion deficit, $3.73 billion larger than had been predicted after seven months of the 2019-20 financial year.
At December’s mid-year budget Treasurer Josh Frydenberg had predicted a $5 billion surplus, which was down from the $7.1 billion surplus forecast at the time of the April budget. Now that looks like its gone (though we won’t know for certain until August).
Dr. Oliver wrote at the weekend that “The run of economic data since the last RBA meeting has mostly been soft with falls in retail sales, construction, and business investment, weak confidence readings, continuing poor wages growth and a rise in unemployment and underemployment which in total were already high.”
Retail sales though for the December quarter will show a contribution of 0.5% to growth (according to the Australian Bureau of Statistics), trade will be solid (but not enough to add to growth in a major way), wages and salaries weak.
Dr. Oliver says the bushfires and the coronavirus “will likely take the economy backwards this (March) quarter with significant uncertainty around the duration of the hit from coronavirus.
“The Australian economy looks to have been soft in the December quarter even before the intensification of the bushfires and coronavirus hit in the current quarter.
“Construction data showed another sharp fall in housing investment and non-residential construction in the December quarter with the latter resulting in another sharp fall in business investment.
“While business investment plans for 2020-21 are up 8.8% on plans made a year ago its narrowly based on a big lift in mining investment with non-mining investment set to remain weak,” Dr. Oliver wrote.
“It’s also noted that while the approach of comparing investment plans on a year ago gives a good guide to the direction of the business investment cycle it looks to have been too optimistic for this financial year with investment tracking around 2% growth compared to an 11% rise in investment plans a year ago.
“Against the background of already weak economic growth and the threat of further weakness to come, the benefits of another interest rate cut – which also include pushing the $A lower – likely outweigh the costs and so the RBA should be easing again,” Dr Oliver wrote at the weekend.
“That said I get the feeling it would probably prefer to wait a bit longer – to better assess Covid-19 and for maybe a more “material” rise in unemployment. But things are moving fast around the threat from coronavirus with very sharp falls in sharemarkets warning that the threat to growth outlook is serious and can’t be ignored.
“And other central banks including the Fed are getting close to easing again possibly in March which runs the risk that if the RBA does not ease and the Fed does then the $A will rise which would put more pressure on the Australian economy. T
“The bottom line is that the RBA should be easing on Tuesday and the probability of it actually cutting is far higher than the 17% suggested by the futures market. It’s probably close to 50/50,” he wrote.
The December quarter GDP will be weak – possibly as low as zero growth and as strong as 0.4%. The AMP says a rise of 0.3% quarter on quarter (1.9% annual) while the National Australia Bank says 0.4% (depending on the data on Monday and Tuesday on wages, salaries, inventories, government spending, and the current account).
Dr. Oliver says any growth will reflect “ recent growth in public spending and contributions to growth from stock building and exports offset by improved but still constrained consumer spending and falls in housing and business investment.
“The slide in quarterly growth back to 0.3% from a recent high of 0.6% in the June quarter will further call into question the RBA’s assessment that the economy has passed through a “gentle turning point”.
Other data releases this week will include house prices for February today, car sales later in the week, building approvals (Tuesday), the trade deficit for January (Thursday) and retail sales for January (Friday). Rises in building approvals, house prices are expected while the trade surplus is tipped to fall under $4 billion and retail sales will be flat to lower because of the impact of the bushfires.
