George is the magazine for St.George Bank’s corporate customers. Aimed at executive-level readers, it features customer case studies, news, articles on emerging business and management trends, product information, lifestyle features and more.
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developments abroad affects domestic demand. It is one of the factors the Reserve Bank of Australia (RBA) is weighing up in its assessment of the growth and inflation outlook. Domestic dealings The RBA has a tough job on its hands. It must assess global economic conditions, which are characterised by the uncertainty cloud over Europe. The RBA, however, is most interested in economic conditions in Asia, especially China, and how developments in Europe will impact. It is with this region that Australia does more than 60 per cent of its trade and it is this region that is helping prop up world growth at a time when the European and US economies are faltering. Indeed, recently the International Monetary Fund (IMF) cut world growth forecasts, but the new forecasts for this year and next are still predicting world economic activity above the long-run average, underpinned by relatively robust economies in Asia. The RBA must also consider the nature of the domestic economy. And here the Aussie economy still carries the 'patchwork' or 'multi-speed' tag. There continue to be key areas of strength in the local economy, namely business investment and the strong income injection coming from the record level of the terms of trade. But there are also sectors in the economy that are finding it tough, courtesy of the high Australian dollar and household caution. Key sectors affected are manufacturing, tourism, education and retailing. Some of these sectors are likely to receive a boost from the RBA's recent rate cut. Indeed, in the lead-up to the November RBA meeting, speculation in the press about the possibility of a rate cut encouraged an improvement in some of these softer patches of the economy and the delivery of the rate cut should see this continue, although it is too early to be certain that it is the beginning of a lasting trend. The improvements have also been witnessed in confidence readings for the consumer and for business; both have witnessed lifts recently. The RBA cut official interest rates by 25 basis points to 4.50 per cent on November 1, giving monetary policy a more neutral stance, providing more support to demand. The low outcome for inflation in the September quarter cleared the way for the RBA to cut interest rates. Underlying inflation was the lowest quarterly outcome for fourteen years and saw the annual rate step down from 2.7 per cent to 2.5 per cent, putting it in the middle of the RBA's 2–3 per cent target band for inflation. In its November Statement on Monetary Policy, the RBA downgraded its inflation forecasts to be consistent with its 2–3 per cent p.a. target band over the course of the forecast period, although underlying inflation is still expected to be in the top half of its target band by 2013. Its growth forecasts were also downgraded to be 3–3.5 per cent over the year to December 2012 and June 2013. This growth rate is around the trend level. www.stgeorge.com.au/george George 35 Home improvement As mentioned above, recent domestic demand partial indicators have shown an improvement. These indicators include retail sales, housing finance, building approvals and employment growth. However, it is too early to assess whether these improvements are the start of a lasting trend, and they still remain on the soft side of the ledger. Together with the uncertainty about the European sovereign debt crisis – which is keeping intact the downside risks to the world economic outlook – the RBA is more likely to lean towards cutting rates again. In the RBA's Statement on Monetary Policy, there was little to suggest that the RBA will embark on a deep rate-cutting cycle. Even the lower range of its forecasts implies quite solid growth outcomes over the next few quarters. However, it highlighted a number of downside risks. We think the November rate cut will be followed by another in February 2012. But the timing and the number of rate cuts are far from a done deal. Confidence will remain a key determinant, especially while uncertainty is higher than normal in the global economy. —4 November 2011 There continue to be key areas of strength in the local economy ... But there are also sectors in the economy that are finding it tough.