The Australian economy is tracking at strong levels despite panic from the RBA.

I spoke to a property developer over the weekend who summed things up succinctly enough. "The problem," he said "is that you people (economists) just have no credibility. No one believes anything an economist says anymore, most of you just talk your company book – you’re up there with politicians. Real business people, not the policy activists, but the real ones, are sick of it," he went on. "Which is it, tell me straight? Is the economy weak or not, should I be afraid or not."

Afraid? Of course not! Of all the ridiculous discussions we’ve had to endure over the last few years none have even been close to reality – you can see that for yourselves just by looking at history. Deflation, the double dips, the eurozone imploding. None of them. Now we even have some talking about stall speed growth in the US – again – for the umpteenth time following Friday’s sluggish jobs growth report. It was only late last year that this phrase was being thrown around – since then 1.5 million jobs have been created. This is strong and not even close to stall speed.

On the domestic front the battle to get interest rates lower has contributed to a sharp deterioration in confidence. The RBA has cut rates and confidence has actually declined afterwards – more to the point we found out recently that building approvals and house prices weakened. This same property developer tells me, and he’s not the only one, that interest rates at this level don’t even feature in his decision making. They could be lower, they could be higher – it doesn’t matter. He just wants banks to starts lending – and confidence to pick up. But confidence cannot possibly pick up with central bankers slashing rates like a bunch of panicky loons.

The RBA board, who I believe are out of their depth, are sending mixed signals on the economy. They are contributing to the confidence rut. Last year we found out that domestic demand was at its strongest in four years – this should have been cause for celebration. Yet the RBA panicked and slashed rates 50 basis points. This year we find out the unemployment rate fell to 4.9 per cent – this too should have been cause for celebration. Yet the RBA panicked and slashed rates 50 basis points. Is it seriously any wonder why confidence cannot respond to those very positive economic reports. Why confidence only gets worse? Why people are confused?

This week there are three major economic events which will do nothing to ease the confusion. On Wednesday at 1130 AEST we get an update on GDP for the first quarter. The consensus is that GDP growth will return to trend after flood distortions and very strong import growth saw GDP growth below trend. For the March quarter, GDP is expected to rise 0.5 per cent for the quarter and 3.2 per cent year-on-year. Domestic demand growth is expected to be much stronger, with net exports detracting 0.7 percentage points from GDP. Very solid metrics which don’t justify rates at current levels or further cuts.

So the economy overall has been doing well and is expected to continue to do well in the March quarter. The property sector we know is weak, but without fail people I talk to in the industry are of the opinion that lower rates won’t do anything – they actually want rates steady for a lengthy period of time. Lower rates won’t encourage banks to lend to developers nor encourage people to borrow while confidence is so low. In terms of the supply of credit, the problem is that commercial banks are using RBA cuts to lift margins and boost profits. This in turn reduces the incentive to take risk and lend. That’s why, and despite lower rates, building approvals are falling and developers are still finding it tough to get cash. Consumers, as we know, don’t actually need rate cuts as spending growth here is at trend or slightly above actually.

But of course confidence isn’t just weak just because of the economic debate. Just about everyone, outside the ALP and their flunkies Oakeshott and Windsor, wants an election. Still, we’ve got a 4.9 per cent unemployment rate, above trend domestic demand growth, a mining boom and solid consumption growth. Things shouldn’t feel so bad, but they do because all throughout the talk has been about how weak things are. We’ve even had some fools talking about the non-mining recession. Things are so bad that even the English are referring to Australians as "whinging Aussies”. You are kidding me!

The other major event for the Australian market is the RBA decision (Tuesday 1430). We’ll probably get that RBA rate cut that some people so desperately want at some stage. Whether that’s at this meeting or the next doesn’t matter. I still think, notwithstanding Australia's strong metrics, that is the bet, but it is really only a guess and you can see why from the consensus forecasts of economists. Half expect a cut, half don’t. The reason there is such a large difference of opinion is because the board isn't relying on traditional metrics to determine policy. They are clearly panicking and appear to be responding to the latest press reports on Europe or what have you. Stall speed growth in the US, the slowdown in China – a chipmunk dropping a nut from a tree. Could that start an earthquake? Maybe. Better cut just in case – 50 to be safe. Consequently it has become an 'unforecastable' event.

Finally, on Thursday we see the labour force numbers. Employment growth has been strong so far in 2012 and the unemployment rate as mentioned has fallen to 4.9 per cent. Yep. For what it’s worth, economists forecast no growth in the merry month of May, while the unemployment rate is expected to rise to 5.1 per cent from 4.9 per cent. There are a few bits and pieces for the Aussie market otherwise – TD’s inflation gauge and company profits today. Then tomorrow we get the current account and public spending figures. Finally, on Friday we see home loans and the trade balance.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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