Bruised dollar takes another hit

Perhaps we don't need the Reserve Bank to talk the Australian dollar down. The Australian Bureau of Statistics hammered the currency on Wednesday.

Reserve Bank governor Glenn Stevens earned a half a US cent dip in the value of the $A just under two weeks ago when he observed that currency market intervention was still part of the central bank's tool kit.

The $A fell by twice as much on Wednesday after the ABS' release of national accounts that showed economic growth of 0.6 per cent in the September quarter, and 2.3 per cent over the year to September.

For those of us who want to see the currency down at a level that provides more economic impetus, it's all good. After dipping below US90¢ at either end of August the $A bounced back up to US96.7¢ in late October before turning down again. It was back around US92.5¢ when Stevens spoke, was at US91.36¢ ahead of Wednesday's release of the September quarter national accounts, and about US90.6¢ as the day ended.

The market's "surprise" that the growth numbers were as soft as they were was in part self-inflicted. Hopes for stronger economic growth numbers rose on Tuesday, when the ABS released balance of payments data that showed net exports would be positive for growth in the September-quarter report.

The analysis was right, but too narrow. Net exports did deliver the expected contribution, but the big picture was very similar to the one painted by the Reserve in its quarterly report on monetary policy last month. It said then that economic growth was likely to trudge along at a rate of 2.5 per cent until the end of next year.

The problem is the one that has been dogging the economy and the markets all year. It is taking longer than expected for growth to shift from an unprecedented resources investment boom to a more balanced mix that includes higher commodity export volumes created by the resources investment, but also stronger activity in the non-resources sector, fuelled in part by cheaper money.

The resources investment caterpillar is on the way to becoming a resources export butterfly. Export volumes were up 6.1 per cent in the year to September, after being up 7.1 per cent in the year to June and 7.5 per cent in the year to March.

An export volume surge that will come when new liquefied natural gas (LNG) export projects come on stream is still a year away, however, and export growth only contributed 0.1 percentage points to overall economic growth in the September quarter. The balance of the 0.7 per cent contribution from net exports came from a seasonally adjusted 3.3 per cent fall in imports.

Meanwhile the resources investment boom itself is tailing off. Continued spending on the giant LNG export projects masks the decline, but Western Australia's growth numbers are an unmistakable sign.

Final demand in WA, a measure of the strength of the state's domestic economy excluding exports, rose 15 per cent in the year to June 2012 as the investment boom peaked. It fell by a seasonally adjusted 2.2 per cent in the September quarter this year: On the state final demand measure, WA is headed for a recession.

Household consumption is also still weak. It rose by a seasonally adjusted 0.4 per cent in the September quarter, and was up only 0.2 per cent in a year. The increased inclination of households to borrow and spend that the Reserve Bank has been referring to in its commentary is barely visible, and households are actually boosting their savings.

A decade ago they were spending slightly more than they earned. In the September quarter they saved a seasonally adjusted 11.1 per cent of their income, up from 10.8 per cent in the June quarter, 10.6 per cent in the March quarter and 10.1 per cent in the December quarter last year.

There's not much meat for local sharemarket investors in all this.

The timing of the US Federal Reserve's quantitative easing taper is a wild card: it will cause volatility when it happens, and bear down on share prices by pushing competing bond yields up.

It will of course also only happen when the Federal Reserve is confident that America's economic recovery can handle it, and it should also aid Australia's non-resources economy by pushing the Australian dollar down.

The Reserve Bank might yet give the $A a nudge itself, by cutting its cash rate again in the new year. It held its cash rate at 2.5 per cent on Tuesday, but goes into the Christmas break on easing bias that is justified by Tuesday's national economic report.

Shares here are, however, now also awaiting Australia's economic baton-pass. They have risen pretty much as far as they can in anticipation of accelerating earnings growth in the non-resources economy. They can't rise easily from here if the economic baton-pass does not occur, giving non-resources companies new earnings growth that drags earnings multiples back down to levels that make them compelling investments again.

mmaiden@fairfaxmedia.com.au