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Cut before we fall

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This week the Reserve Bank gambled that the current level of interest rate pressure won’t force the entire economy to follow the retail sector into recession.
On Wednesday, it looked like a bad punt but by Thursday the Bank looked on the money.
Or was it?
On Wednesday, new home loans fell by 25.1 per cent in the first six months of 2008. This was the weakest since 1989.
In case you forgot this was the year before the economy headed into recession.
For the year, total housing finance commitments slumped 24.8 per cent and this is the worst collapse in 13 years.
Given the role of housing in laying the foundations for recession or economic recovery, this was not great news for the board of the Reserve Bank who wants to wait until they cut rates.
The Governor the Bank, Glenn Stevens, did indicate that a cut is on the cards but we need to wait.
By Thursday, the latest unemployment figures suggested that Mr Stevens is not a dunderhead with unemployment steady at a low 4.3 per cent.
A recession will lead to bankruptcies and higher unemployment so these good jobless figures had to be seen as a vindication of the Reserve’s cautious stance.
Against this, it has to be said that unemployment is a notoriously lagged economic indicator. If the ‘you know what’ is only now hitting the fan with retail figures, the job cutbacks could be just about to happen.
Also some economists think because of the retiring baby boomers and the nature of our very mobile Gen Y workers, many bosses will do something called ‘hoarding workers’.
This means they try to cop some higher costs and lower profits hoping the downturn won’t last all that long, so they won’t have the difficulty and cost of recruiting again.
Also, because of the export link to China many companies such as miners won’t even be experiencing softer sales. They are recession proof until China goes into reverse.
Back on the job numbers, there are doubts about their validity because of cost-cutting at the Australian Bureau of Statistics, which meant the sample size for the survey was cut by 24 per cent.
“Given the uncertain effects of the crazy cost-cutting shift to a new one-quarter smaller survey-sample size, the ABS's monthly jobs data now are a ‘waste of space’ for economy-watching purposes, today and for the next several months at least,” said Macquarie bank’s Rory Robertson.

Robertson thinks a September cut is certain and it could even be 0.5 per cent. The run of good versus bad news will determine the timing and the size of the cut. 

Published on: Saturday, August 09, 2008

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