THE DISTILLERY: Australian paradox

A handful of commentators have put some effort towards explaining an apparent paradox that presently exists in the Australian economy. Interest rates are near emergency levels, but the unemployment rate is pristine. Those two don't normally go together.

This morning, The Australian Financial Review's David Bassanese addresses this question in a crucial piece of commentary. It's crucial because it'll get readers thinking about interest rate levels in a different way.

Bassanese begins by pointing out that the gap between the Reserve Bank's cash rate and the rates that banks are actually charging their lenders has widened since rates were at the "emergency” 3 per cent level.

"If the RBA wanted to produce the same 'emergency' level of mortgage rates as in 2009, it would need to cut the official cash rate to 2.5 per cent. Another headwind relative to 2009 is fiscal policy. Back in 2009, the Labor government unleashed a series of stimulus measures amounting to $42 billion at the same time as the RBA was slashing interest rates. According to Treasury, the fiscal boost was estimated to increase national output by 2 percentage points in 2009.

"Yet while the government also in effect provided some stimulus a few months ago (by bringing forward family payments and carbon tax compensation), it was far smaller than in 2009 – and should be quickly unwound by a sharp tightening in the budget in the final months of this financial year. All up, estimates by Treasury suggest the lurch toward budget surplus this year will have a contractionary effect on the economy equal to about 1 per cent of gross domestic product. In other words, the difference in fiscal stance between this financial year and 2009 is equal to about 3 percentage points of GDP – or almost a full year worth of economic growth.”

Throw in a high Australian dollar and it's easy to see why the economy is struggling more than it might otherwise be expected to. Speaking of the dollar and rates, Fairfax's Malcolm Maiden writes that yesterday's trade deficit figures show why the central bank wants the dollar to fall.

"The market consensus was that Australia would post a $670 million trade deficit in August. Instead, the deficit was $2.03 billion as exports fell 3 per cent to be $3.4 billion lower than they were a year ago, and the estimate of the deficit for July was increased from $556 million to $1.53 billion. The trade deficit is blowing out because Australia is caught in a currency-commodity trap. Export revenue is falling as prices decline and volumes ease (iron ore export volumes were up in August but coal volumes were down), and the Australian dollar is not falling fast enough to produce an offsetting currency exchange gain as $US commodity revenue is translated into Australian dollars. The high dollar has also been sucking in imports: they fell by 1.3 per cent in August compared with July, but are still 6 per cent higher than they were a year ago.”

And finally, we look at interest rates through the sector they're most associated with – housing. The Australian Financial Review's Robert Harley addresses the question that the property industry was asking the moment the Reserve Bank cut rates on Tuesday, is this the beginning of the turnaround?

"Not quite. New housing starts, at near 135,000 in 2011-12, are in the trough. But the recovery will be stubbornly slow and patchy. Industry analyst, BIS Shrapnel predicts new housing starts will rise just 3 per cent in 2012-13, to 141,650. On the BIS Shrapnel forecasts, some markets will have a substantial recovery. NSW will be the first to move, from its low base, with starts rising 21 per cent; Western Australia, up 26 per cent, and Queensland, plus 10 per cent, will follow. But the national recovery will drag because of the slowdown in South Australia and, most of all, in Victoria where BIS predicts a 14 per cent decline in starts.”

Speaking, in a way, about rates, Fairfax's Peter Martin has found a report indicating that Australia's big banks tend to wait in the event of an interest rate cut, while they don't hesitate to bump up their rates when the Reserve Bank goes up. The Distillery challenges any reader to reach deep into their psyche upon reading that sentence to see if they can find even a vague sense of surprise.

The Australian's Glenda Korporaal looks at the ongoing uncertainty in the superannuation industry as it waits for the parliament to approve legislation that will mandate employers to put their staff onto a MySuper-compliant product by default. Only when the legislation is officially passed and becomes law, will the super players know what they have to be compliant with.

The Australian's Robin Bromby says that the $US500 plunge in nickel prices within 10 minutes on Tuesday is indicative of the confusion that's "dominating” the commodities markets.

In company news, The Australian Financial Review's Chanticleer columnist, Tony Boyd, has the best piece so far outlining the likely motivations for Nine Entertainment's senior and mezzanine lenders to play chicken with insolvency.

In international news, The Australian's Asia Pacific editor, Rowan Callick, emphasises the seriousness of the island dispute between Japan and China. Meanwhile colleague Peter Wilson finds a survey indicating that most large multinationals believe that Europe will be forced out of the eurozone.