We have a multi-speed economy that could do with more down-shifting

THE June-quarter national accounts give a bit more comfort about interest rates, which must fall further to lay Australia's part of the foundations for a sustained market recovery.

After seeing these numbers, Reserve Bank governor Glenn Stevens will be more comfortable with Tuesday's rate cut, and more confident that the weight of evidence is for further easing.

But the accounts also reinforce the cautious call that the Reserve made in association with its cut in the cash rate from 7.25% to 7% - that countervailing forces are still pushing up and pulling down on growth.

The picture the accounts present is, if anything, more complicated than it was. The challenge for rate setting, as the Reserve set out on Tuesday, is that higher debt costs, declining share and house prices, and higher energy and food prices are sidelining householders but not yet making inroads into a commodity boom that is swelling income and boosting business investment, albeit in a geographically and sectorally selective way.

The conventional representation of this tussle is that Australia is a two-speed economy, with the resources-rich states of Western Australia, Queensland and the Northern Territory in the fast lane, and the rest lining up behind.

Yesterday's state-by-state breakdown of demand growth shows a more complex picture, however. WA, Queensland and NT continue to perform, posting June-quarter demand growth of 2.4%, 1.2% and 2% respectively, and demand growth in the year to June of 7.2%, 5% and 7.9% - strong, albeit in the case of WA and Queensland, down from growth of 9.7% and 7.2% in the year to last December.

But on the eastern seaboard there is now a sharp contrast between the performance of the states that sit at the heart of Australia's industrial and commercial economy. NSW actually posted a 0.1% decline in demand in the June quarter, and demand growth of 2.7% in the year to June. Victoria produced demand growth of 1.8% in the June quarter, and growth of 4.9% in the June year, getting up towards twice the growth rate of NSW.

This trend has been developing for a while: demand growth in Victoria edged above that in NSW in the year to December, at 5.2% versus 4.5%. But the gap has opened up in the June quarter because NSW has slowed sharply.

The national accounts don't say why, but capital works including EastLink

and Melbourne's channel-deepening project have cushioned Victoria; and I suspect that the credit market squeeze is generating more mortgage stress in Sydney, and more sharemarket stress too, given that Sydney investors were the key catchment for many of the floats that have either run aground in the squeeze (think Babcock, Allco and RAMS), or been marked back heavily (such as Macquarie).

State differences aside, the key numbers in the national accounts are the ones that underline the Reserve's continuing dilemma as street-level spending slows to a crawl and the commodity boom continues. Seasonally adjusted, household expenditure actually fell by 0.1% in the June quarter, and subtracted the same amount from growth in the quarter.

This was the first negative number from households since the September quarter of 1993, and seasonally adjusted household spending growth of 2.9% in the year to June was sharply down from a growth rate of

5% in the year to December.

The bottom-line national economic growth numbers of 0.3% for the June quarter and 2.7% for the year to June came after a 4.6% jump in business investment in the June quarter and a 10.8% rise in the June year, and export growth of 2.7% in the quarter and 6.1% in the year. They both owe their strength to the commodities boom and the dollars that resources groups are spending to ramp up production

to take advantage of strong commodity export prices.

The 0.3% quarterly gross domestic product (GDP) expansion rate was slightly below the consensus prediction of 0.4% for the quarter, and slightly above the Reserve's own forecast of 0.2% growth.

The growth almost certainly continued to contract after June 30 - NAB's recent business surveys are leading indicators of that - and the figures on balance give the markets more confidence that Tuesday's rate cut won't be the last.

Given the studied neutrality in the Reserve's commentary on the first rate cut, the timing and extent of the cuts remains unclear, however, and for investors this is a crucial point.

As Evans & Partners strategist Mike Hawkins observes, a single quarter-percentage-point rate cut doesn't justify a buying frenzy.

Hawkins says the building blocks of a sharemarket recovery are beginning to appear now, with interest rates headed lower, the dollar 15% below its mid-July high of US97.98, the US housing market showing signs of bottoming, and analysts here and overseas finally acknowledging reality and scaling back earnings projections for industrial companies, not just the financial groups.

He says, however, that a cut of 1 percentage point in total is probably needed to deliver the kind of pro-growth environment that will produce a new round of profit upgrades.

The first cut doesn't get the markets there. It is about limiting the extent of the downturn rather than priming the next upswing, Hawkins contends.

And while yesterday's data gives investors more confidence that the Reserve will lower rates again this year, the evidence of a multi-speed economy in the accounts means a course of four quarter-percentage-point cuts is a hope rather than a certainty, or even an expectation.

mmaiden@theage.com.au