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Why the Reserve Bank needs to think outside the square

Just for the moment let us try to escape the polemics surrounding whether the Reserve Bank should or should not cut interest rates.

And let’s think outside the economist’s square and ask the question, do we have to say to the many non-mining sectors of the economy, too bad you’re struggling?

This week’s economic data tells me that we might be over-preparing ourselves for the future shock of the super-cycle of externally generated growth that lies ahead of us. This rosy road was outlined in The Australian last Friday arising out of a special report from ANZ.

But that’s tomorrow — what about today and yesterday?

The Federal Treasurer last week tried to put a wet blanket on the hot tempers of the business owners struggling to cope with the consequences of the two-speed economy.

Those impacts, in a nutshell, are — too high interest rates, a very strong dollar, many beaten up industries and a looming threat of higher inflation.

Mr Swan cheered the second quarter economic growth numbers of 1.2 per cent and shrugged his shoulders saying that for those struggling businesses you can blame “the patchwork economy”.

Those growth figures showed consumption was better than expected but apparently we are ditching retail goods and opting for services. The Treasurer seemed chuffed that while whingeing retailers were battling, it wasn’t because of the economic settings. It was a consumer choice thing — that was insensitive and I suspect a little too cute for my liking.

I bet Aussie consumers would return to DJs and Harvey Norman and a whole team of smaller businesses if the dollar was 80 US cents and interest rates were 0.5 per cent lower.

For starters there would be less Aussies going overseas to shop at Bloomingdales instead of Myer and Flight Centre’s share price would be a bit lower as well.

Sure consumers are into pampering services — that’s a trend — but the economic settings of Government and the RBA are having an impact as well.

By Thursday, the Treasurer was talking about Craig Thomson and did not seem to be on the front foot with the jobs figures, which showed that unemployment had gone from 4.9 per cent to 5.3 per cent in a few months.

As often happens, the economists’ computer models missed the new jobs figure by about 20,000 with the expected 10,000 created actually closer to 10,000 lost.

“The data is a reality check for those people that think the economy is shooting the light out,” says CommSec economist Savanth Sebastian. “The latest result is also consistent with the anecdotal evidence we are hearing from businesses outside the mining sector.”

He went further: “The rapid fire rate hikes and sluggish consumer activity is a clear driver of the more subdued labour market conditions.”

The outside-the-square thought might be that we can cut rates short-term and if the fantastic future comes quicker than expected well then raise ‘em. Maybe this is too simple for economists whose complex models to date look like they need some remodelling.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, September 13, 2011

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