Will the Reserve Bank board cut its key interest rate at its May meeting today, or will it wait for a month before cutting the cash rate by 0.25% to 2.7%.
Some leading commentators reckon there’s a need for another rate cut because the economy is travelling as well as it could be. Westpac’s chief economist, Bill Evans and the AMP’s Shane Oliver both said at the weekend that the central bank could cut rates if it wanted to.
They told readers of their weekly missives that the softer news from the overseas and local economy meant the RBA had room to cut rates again – but both believed it won’t move until June, after the Federal budget next week and more data on first quarter economic performance, especially the April jobless data this week and the business investment figures for the March quarter later in the month.
For example, Dr Oliver said: "with the response to the rate cuts of the past 18 months proving to be very tentative and the mining investment slowdown now looming close it would make sense for the RBA to provide a bit more insurance for the economy by cutting interest rates again."
"Benign inflation in the March quarter provides it with plenty of scope to do so. Ideally the RBA should cut on Tuesday but it may prefer to get a look at the Budget the week after and March quarter business investment data to be released later in May. So while I expect a cut in the cash rate to a record low of 2.75%, I am agnostic as to whether it’s on Tuesday or next month."
While the local economy is travelling at just under trend (GDP growing around 2.5%), inflation is low and unemployment low. the economy might not be roaring ahead, but it’s not imitating economies in Europe or the US by limping along, burden by weak confidence, high unemployment and debts.
But housing and non-private dwelling investment remains sluggish, credit growth is still slow and the RBA is waiting to see that improve, along with non-resource investment. They remain key to the central bank’s belief that the economy can move from the resource boom, to solid domestic investment as a source of future growth, especially employment.
But two key parts of the economy continue to do well – without much comment from analysts and the media.
On Friday there was more positive news about the economy in good car industry sales figures for April – which are now running more than 5% ahead of 2012 after the first four months to the year. If this continues, car sales for go close to a record high this year. Imports are of course doing very well and locally made cars are weak and facing falling sales, and employment -0 which get’s the headlines. The booming import sector and employment goes unnoticed as a result.
As well, leading retailer, JB Hi-Fi surprised with a profit upgrade for the 2013 financial year – with two months to go. The company is a bellwether stock for the consumer electricals sector and it seems from Friday’s update that this sector is back as a growth driver for retailers.
The 11% rise in earnings predicted by JBH adds to the better news on retail sales we saw in January and March.
JB Hi-Fi said it now saw net profit for the year to June 30 in the range of $112 million to $116 million, up 11% from 2011-2. The company had previously told the market to expect profits of between $108 million and $112 million. JBH shares jumped 8%, or $1.25, to $16.75 on the news.
JBH – 12-Month Performance
This raises the question that if the two sectors heavily skewed to consumer confidence as car purchases and consumer electricals are doing well, is a rate cut really needed when the RBA has cut its key rate by 1.75% since late 2011?
And then there are there are the latest reports of our biggest banks, led by the ANZ and Westpac last week (the NAB reports this week). Record results, dividends and rising share prices tell us investors are not nervous about the outlook for the banks (they seem to be more worried about the impact of what’s happening in the eurozone on our banks than what is happening in the local economy).
Last week the ANZ and Westpac both revealed lower their bad debt provisions four the March half year. That tells us they reckon there are no real problems in the economy, despite many in the small and medium business groups (and in sectors like manufacturing and parts of farming claiming things are tough). The Bank of Queensland took a similar view the week before, and earlier in the year, the Commonwealth, the country’s largest bank took a similar view in its huge retail business (which is the country’s biggest home lender), the biggest in the country.
Westpac reported on Friday that it had cut its provision for bad debts by a massive 28% to just $438 million as souring loans fell in its key business, its Australian domestic retail unit which is the country’s second biggest home lender.
The ANZ’s provision for bad and doubtful debts fell 13% to $599 million in the six months to March 31. Gross impaired assets dropped 10% and new impaired assets fell 15%, half on half with the ANZ saying all its divisions saw falls in the level of newly impaired asset.
And Bank of Queensland’s provision plunged to just under $60 million from more than $268 million (which was a clean out of bad debts after new management took over). More important, the Bank of Queensland said its impaired assets fell to 1.8% of loans from 2%.
And in February, the Commonwealth Bank, the country’s largest said at December 31, the bad debt provision rose 13% because of a small number of loans in its business banking group soured. But the bad loan provision in its biggest business, Australian retail (home loans etc) was a better indicator – it fell 31% to $246 million at the end of December 2012, from $356 million at the end of 2011. The CBA provides a third quarter update on its trading next week.
If the banks were really worried about the outlook for the economy, house prices etc, they would not be as aggressive in cutting their provisions, nor would the level of impaired loans be falling. the banks all add what’s call an "economic overlay" to their provisions and estimates of bad loans to take account of they view of the economic outlook.
The banks may all be too confident and missing signals from the economy and some sectors as a result. But they seem to have sharped their skills since the GFC when they all lost billions on dud loans they missed going bad (ABC Learning, Allco, Centro, for example).
And the current demand from investors for higher dividends (Westpac paid a ‘special’ dividend to ‘reward’ shareholders) has helped boost the banks’ share prices this year – and perhaps many investors have become too confident and not looking more deeply at the state of the domestic economy.
But the way they have reduced their bad debt provisions (which helped boost profits and pay higher dividends), the sluggish nature of domestic demand doesn’t seem to be ringing alarm bells about the health of the economy and key sectors such as home lending.
