THE DISTILLERY: Rate scales

Jotters weigh the external and internal factors to help the RBA with its decision tomorrow, while one looks to history for a European monetary precedent.

Australia’s business commentators have not yet started the debate whether the Reserve Bank should cut the cash rate by 50 basis points tomorrow – perhaps that’s for this afternoon’s deadline, or it might not begin at all. But they have agreed that rates should drop. As two commentators relay the case for a rate cut, two others focus their attention on the main international reason for worry in Australia – China. One explains the scale of concern, while another offers a useful economic and environmental solution for Beijing.

Firstly, The Australian’s economics editor David Uren explains why the objectors to last month’s 50 basis point cut have gone quiet this month.

"Mad May has transformed the global economic outlook like no other month since September 2008 brought the collapse of Lehman Brothers. Capital has taken wing over the last four weeks, fleeing equity markets and the securities of vulnerable countries and seeking safe haven in the bond markets of the handful of highly rated countries, including Australia. A run of weak data from the four corners of the globe has extinguished hopes that the pall of the global financial crisis was at last beginning to lift. The figures of one month do not give a clear direction, but at the moment a simultaneous global slowdown looks like the most likely path.”

Some may still argue – quietly – that the Australian employment figures are simply too strong to justify a rate cut. In steps The Australian Financial Review’s David Bassanese:

"Labour market performance is another oddity. After weak jobs growth last year, there have been tentative signs of a pick-up in the early months of this year – and the unemployment rate has dropped to only 4.9 per cent. But most employment demand so far this year has been for part-time staff only. Labour force participation remains low, and job advertisements are down on year-ago levels. One of the clearest areas of weakness is the housing sector, where building activity, loan approvals and house prices continue to decline steadily. Cuts to the official cash rate over the past year have been insufficient to boost sentiment. Lower interest rates are needed merely to help stabilise this critical sector.”

Part of the dilemma for the Reserve Bank is that, in order to benefit from the mining boom the Australian economy needs a period of structural reform – struggling industries need to go – which means higher rates when we can afford it. The Age’s Asian affairs reporter Peter Cai finds a growing pile of trouble for Australian miners in China, which paves the way for lower rates, at least for the moment.

"Mountains of iron ore at Chinese ports used to be a sign of a booming Australian resources sector, but it has turned into a source of headaches for Chinese commodity traders who are struggling to find buyers for their stockpiles of red dirt. The Port of Qingdao, through which a seventh of all iron ore imports to China pass, has run out of space to take in more goods. Thousands of trucks and dozens of trains have transported iron ore each day from the port in China's north to hundreds of steel mills to feed the country's insatiable demand for iron ore. But the number of trucks and trains has declined significantly. Restaurant owners near the port and truck drivers have felt the impact most acutely. The stockpile of ore is now estimated to have hit 15 million tonnes and growing.”

And fourthly in this morning’s shot from The Distillery, The Australian Financial Review’s Alan Mitchell suggests that China could quicken its economy and address its growing pollution problem at the same time.

"Environmental degradation is a major cost to the economy and reducing it is a popular mainstream political cause. According to the World Bank, the cost of environmental degradation and resource depletion was almost 10 per cent of gross domestic product over the past decade. The cost of air pollution was estimated at 6.5 per cent of GDP; the cost of water pollution was put at more than 2 per cent; and soil degradation was just over 1 per cent. An Australian politician recently related how, on a visit to Hong Kong, his eyes were stinging as a result of the pollution carried by the wind from southern China. Moreover, the Chinese government has plenty of money and will be looking for ways to spend it. Therefore, it could be the taxpayer rather than the individual producers and their workers who carry the cost of reducing their air pollution and cleaning up the waterways – at least during the period in which economic growth is under threat. Throwing lots more money at pollution could be very popular – which, for a government such as China’s, makes it almost irresistible."

The Age’s Michael West explains why market participants are so nervous as to price in an interest rate scenario that assumes China will blow up, Europe will fall over and the US will re-enter recession.

Just sticking with rates for the moment, The Age’s Peter Martin finds AMP chief economist Shane Oliver urging the Reserve Bank to cut interest rates by 50 basis points tomorrow – at least someone could offer a figure. The same paper’s economics editor Tim Colebatch looks at the state of the Victorian economy amid hopes that the Reserve Bank will cut interest rates.

Still on the economy, The Sydney Morning Herald’s economics editor Ross Gittins is still pouring over the budget papers, this time trying to decipher what the government is spending on infrastructure. In a separate piece this morning, Gittins laments the government’s loss of strategic purpose.

Meanwhile, The Australian’s economics correspondent Adam Creighton reaches back into the 19th century to find concrete evidence that Europe hasn’t learned from the mistakes of previous movements towards monetary union.

In company news, The Australian’s Errol Simpler, while addressing Gina Rinehart’s apparent reluctance to take a Fairfax Media board seat without pledging to leave editorial alone, offers a nuanced defence of News Limited’s own "pluralistic” model. Meanwhile, The Sydney Morning Herald’s Ian Verrender looks at the James Packer-Jeff Kennett union for control at Echo Entertainment.

Thankfully, The Age’s Michael Maiden finds Westpac Bank boss Gail Kelly unconvinced that the collapse of Hastie Group is the beginning of a string of big corporate casualties. The Sydney Morning Herald’s Elizabeth Knight speaks to Qantas boss Alan Joyce, who reveals the airline is thinking about an incentive scheme for in-flight attendants. The Age’s Adele Ferguson looks at the consequences for Cabcharge that could emanate from the inquiry conducted by former consumer watchdog boss Allan Fels. And the same paper’s Madeleine Heffernan discovers that the healthcare sector has shrugged off the market downturn like a prehistoric ailment.

Elsewhere, The Australian’s Glenda Korporaal finds West Australian Premier Colin Barnett characterising Australia’s relationship with China as one between Beijing and Perth. And finally, The Australian’s John Durie discovers at his newspaper’s business leaders forum that the two main concerns for the Australian economy are the political troubles in Brussels and Canberra.