RBA rate cuts continue to work through the economy

The flow of optimistic news continued this week. A report by a university research group released this week, says the worst of the economic downturn is over. According to its economists, quarterly GDP growth in Australia is forecast to remain virtually unchanged in the June and September quarters, before rising to 0.3 per cent and 0.5 per cent in the December and March quarters. This growth will be supported by an up-tick in household consumption and exports, even as unemployment rises.

These findings are backed by data from the Australian Bureau of Statistics, which reported the first increase in total sales of new motor vehicles since January 2008. The May 2009 trend estimate for new sales, at 72,532, was 0.1 per cent higher than the corresponding estimate for April 2009, while seasonally adjusted sales increased by 5.4 per cent.

While the economic indicators of the past month have been positive, the Australian economy is not yet out of the woods. A lot depends on the extent to which the global recession will affect our economy. Bad news from abroad could have a negative effect on our exports, business investment in Australia, levels of unemployment and consumer confidence. That in turn could force the government to look at further cuts in the official rate to stimulate the economy.

This is why market participants remain firmly focused on the key economic indicators being released each month from the United States and China. News released in these economies will have a significant impact on the speed at which the Australian economy turns the corner.

In the United States, interest rates were held steady at between zero and 0.25 per cent this week, with congress members recognising a modest improvement in economic outlook since the March meeting. For example, home sales figures are showing moderate signs of improvement, and household spending is showing signs of stabilising. However, they cautioned economic activity is likely to remain weak for a time.

Less positive was a World Bank report released this week, which predicted the world economy will contract by 2.9 per cent this year, compared with a previous forecast of 1.7 per cent. Much of this decline is expected to be centred in developing countries, for which the World Bank predicts a 4.5 per cent contraction in GDP.

The Australian economy remains in better shape than most developed economies, but it is not immune to the global crisis. Stimulation of the economy will remain necessary for some time. Given the recent up-tick in economic news, and still relatively low inflation figures, the RBA is likely to keep interest rates at 3 per cent.

Infochoice.com.au