THE DISTILLERY: Dollar force

The usual weekend musings about the Australian economy from the nation’s business scribes come with some extra pep this time around, courtesy of the Reserve Bank’s pending interest rate decision and some long awaited currency relief. The important takeaway is that the Reserve Bank probably won’t cut tomorrow, but that’s not to say that the lower Australian dollar will be leading to any immediate rebound, or that the economy is on a radically better trajectory.

The Australian dollar’s fall could have a somewhat immediate psychological impact on consumers. But that’s about it in regards to immediate consequences for most of us, according to The Australian’s economics editor David Uren.

“At the docks, the currency move will translate quickly to import prices, however it will take a lot longer before it starts filtering through to consumer prices more generally. When compiling its last quarterly monetary policy statement, the Reserve Bank was puzzled why consumer durables prices were falling despite a reasonably stable exchange rate and steady import prices. It concluded that intense competition in the face of weak demand and structural pressures, such as the growth of online shopping, were resulting in the compression of margins at both retail and wholesale levels. There is a limit to how low margins can go, but the Reserve Bank would not be expecting any immediate change in that dynamic.”

The Australian Financial Review’s David Bassanese writes that the Reserve Bank should feel little immediate need to cut interest rates at tomorrow’s meeting, given that auction clearance rates are rising in Sydney and Melbourne and the Australian dollar is weakening.

“That said, as the economic growth transition from the mining to non-mining sectors over the coming year is unlikely to be smooth, it’s far from clear that the Reserve Bank rate cut cycle is over.”

Indeed, Business Spectator’s Stephen Bartholomeusz notes that the Reserve Bank would be well aware that its succession of rate cuts over the last 18 months has had minimal impact.

“Economists are dividend in their view about the condition of the economy and on the likelihood of further rate cuts, with some convinced that as the resources boom recedes and the dollar retreats it will be possible to finesse a relatively smooth re-balancing of economic activity towards the non-resource sectors. With both major parties committed to deficit reductions the RBA and monetary policy will have to play a pivotal role in any finessing. With the fate of the dollar apparently tied to developments in the US and the actions of the Fed the RBA might want to hold off, preserve its firepower and options and wait to see whether more positive signals from the US economy will trigger another downward lurch in the value of the Australian dollar without its own intervention.”

Turning our attention to the broader economy – rather than the movements and implications of interest rates and the Australian dollar – The Herald Sun’s Terry McCrann explains how the relatively comforting Australian economic ‘forecasts’ from the OECD are a bit of an illusion. They’re just the Treasury’s numbers.

“Treasury forecast in the budget that the economy would grow by 2.75 per cent in 2013/14. The week before the Reserve Bank would only forecast a broad range of 2-3 per cent for growth over that period. And added that the outcome mightn't even be in that range! The really big thing to understand about this is that it's not just about who's a better forecaster. Who can boast after the event, they were 'right', or perhaps, 'least wrong'. Like a footy tipping contest. It points to an important understanding inside the RBA that the future is literally unpredictable. And even more importantly, that the RBA will approach its setting of interest rates with that understanding front and centre. If it sees the growth rate heading for 2 per cent or lower, it would do very different things to interest rates – that is to say, cut them – as against it seeing the economy picking up to a 3 per cent growth rate or higher. And crucially, it would do those things sooner. But not, to make the point, on Tuesday.”

Much of the discussion over the last week about Australia’s economic fortunes has been inspired by recent comments from Professor Ross Garnaut, who’s now at the University of Melbourne.

In regards to Garnaut’s speech that warned of “hard times after more than two decades of prosperity,” Fairfax’s Ross Gittins offers the following on two problems Garnaut believes will be particularly important managing – the falling exchange rate and the expectations for an endless rise in living standards.

“I think he's making two points. One is that economic life consists of downs as well as ups, losses as well as gains, and anyone who imagines governments should or even could shield them from all unpleasantness is destined for disillusionment. The need for income earners not to be compensated for the higher cost of imports caused by a fall in the dollar is a case in point. The other point is we must disabuse ourselves of the notion economic life is about sitting around waiting for another serve of prosperity to be handed to us on a plate. Outside of resources booms, we have to make our own luck.”

Indeed, Australia’s economics fortunes are dependent on a global economy where everyone is fighting just about as hard as we are, if not harder. Some of this activity supports the developed world growth, and The Australian Financial Review’s economics editor Alan Mitchell points out that some of the some of the countries we’ve been relying on to deliver global growth are starting to stutter.

“Two years ago, emerging market and developing economies contributed almost 80 per cent of the world’s per capita GDP growth. Now economists are questioning the extent to which these legendary growth engines will be able to support the recovery of the major developed economies. Growth in several of the major emerging market economies, also known as the BRICS (Brazil, Russia, India, China and South Africa), has slowed. However, core inflation has not, and this has raised concerns about their underlying growth potential.”

In other economics news, Fairfax’s Tim Colebatch welcomes the thirtieth anniversary of the accord between the Hawke government and the unions with the $1.5 trillion superannuation milestone that Australians have accumulated.

The Australian’s Robin Bromby has some word from veteran Sydney gold analyst Keith Goode that a recent plunge in gold prices had more to do with the movements of the major investment banks than anything fundamental.

Fairfax’s Adele Ferguson and Chris Vedelago have a seriously concerning exclusive detailing the Commonwealth Bank of Australia’s concealment of “financial improprieties by one of its top financial planners who controlled an estimated $300 million in investments on behalf of 1300 clients, many of them retired and with serious health issues”.

Meanwhile, The Australian Financial Review’s Jennifer Hewett argues that there’s a connection between Labor’s farcical attempts at reforming public funding for political parties and recent movements to extend some favours to the unions. It’s all about cash, bucks, dosh.

The Australian’s Richard Gluyas smashes Opposition Leader Tony Abbott for his paid parental leave scheme…and so he should. The policy is staggeringly generous.

And finally, The Australian Financial Review’s Chanticleer columnist Michael Smith looks at the stalled talks between the big supermarkets and their suppliers about a voluntary industry code of conduct.