US attacks turn rate outlook downward

The terror attacks in the United States will overshadow the week’s strong GDP and jobs figures in determining the outlook for interest rates.

This raises the possibility of further rate cuts in Australia in coming months.

The GDP figure of 0.9 per cent for the June quarter confirms recovery was proceeding apace in Australia at the end of the financial year while the 72,000 rebound in full time employment in August does much to erase the fears over July’s record fall of 79,000.

However, the shock to the US and world economy that will flow from the attacks on New York and Washington adds significantly to the fears of economic downturn in the US that would inevitably drag a weak world economy with it.

A further US interest rate cut was already largely expected by October and is probably now inevitable given the hit the US economy will take from lower business and consumer confidence, financial markets either closed or volatile, falling share prices, higher oil and commodity prices, and the negative effect on specific industries such as insurance and transport.

On the domestic front, the 72,600 jump in full-time jobs and 4,600 rise in part-time jobs suggests last month’s dramatic fall was a statistical blip and a further sign that the job market is turning upward.

The quarterly GDP rise of almost 1 per cent shows the Australian economy, despite full year growth at a low 1.4 per cent, chugging along at an annualised rate of 3.6 per cent in the June quarter. This was on the back of healthy consumer spending, booming exports, a strong construction sector, a solid manufacturing performance and a build-up of inventories.

This picture completes the recovery scenario, however, the RBA has already signalled it is concerned about the external threat to our recovery in cutting rates again last week. Depending on how events pan out in the aftermath of the attacks on the US, there may well be a need for further rate-cut stimulus now that the international economic threat to Australia has this significant added dimension.