NATIONAL AFFAIRS: by Peter WestmoreNews Weekly
RBA cuts rates as economy braces for "perfect storm"
, October 13, 2012
The Reserve Bank of Australia’s decision to cut interest rates to 3.25 per cent anticipates a serious cloud over the Australian economy, but its silver lining will assist struggling Australian families facing sharp increases in gas and electricity charges as a result of the carbon tax and the mining tax.
The official interest-rate level is approaching the lowest level reached at the height of the global financial crisis in 2009, when it appeared that the economy was headed for recession, if not worse.
On that occasion, the federal government responded with a spending spree, firstly with direct payments to taxpayers and pensioners, then with its multi-billion dollar pink batts scheme and its $15 billion dollar schools hand-out, called “Build the Education Revolution”.
However, there is no prospect of a similar stimulus this time, as the federal government’s budget deficit last year was about $40 billion, and the Treasurer, Wayne Swan, has repeatedly promised to bring it back into surplus this year, before the next election.
The carefully-worded statement by the governor of the Reserve Bank, Glenn Stevens, indicated that the RBA expects:
• a weakening in the global economy;
• a further slide in China’s growth rate, “and uncertainty about near-term prospects is greater than it was some months ago”;
• continued weakness in the European economy, as a result of the Greek and Spanish debt crises;
• an end to the resources boom, with “the peak in resource investment … likely to occur next year, and may be at a lower level than earlier expected”.
Within Australia, the Reserve Bank chief pointed to continued growth of the economy, fuelled by the resources boom, growth in consumption expenditure, moderate wage growth and low inflation.
Arguably, Mr Stevens and the Reserve Bank have failed to note the severe contraction in Australian manufacturing and retailing which has occurred in recent months. The effects have been masked by continuing imports, funded from overseas, and the growth in the supermarket duopoly, Coles and Woolworths/Safeway, at the expense of small retailers.
The RBA governor acknowledged the effects of the introduction of the carbon tax, saying, “The introduction of the carbon price is affecting consumer prices in the current quarter, and this will continue over the next couple of quarters.”
For home-buyers, the cut in interest rates will offset rising prices caused by the carbon and mining taxes, as they will face lower mortgage rates as a result of the RBA’s decision.
Cuts in state government employment over the forthcoming year, recently announced in Queensland, New South Wales and Victoria — as Coalition governments attempt to address the debt mountains inherited from former Labor governments — will exacerbate the two-speed economy.
The structural problems facing the Australian economy have been highlighted by several recent developments. Australia’s largest irrigation property, Cubbie Station, has been sold to an overseas consortium, led by a Chinese fabric manufacturer.
Australia’s domestic steel industry appears to be heading into foreign hands, with Japan’s Nippon Steel investing $450 million in BlueScope steel, and a Korean-led consortium taking over OneSteel, now called Arrium, for $1 billion.
Ford Australia has cut back production. GMH has committed to maintaining manufacturing until at least 2022, but only after receiving funds from the federal and South Australian governments.
The CEO of Elders, which has extensive interests in rural and regional Australia, warned that food manufacturing could collapse, following the closure of six factories by G.J. Heinz, SPC, Ardmona, McCain and National Food, over the past two years (Weekly Times, September 26, 2012).
The Australian Food and Grocery Council said that production from the domestic food and grocery sector had declined $7 billion over the past seven years, and Australia’s deficit in groceries alone was about $10 billion a year.
Even the Labor government’s economic and climate adviser, Professor Ross Garnaut, has highlighted the danger of the Australian economy facing a crash landing. Interviewed on the ABC television’s Lateline program on October 1, he said Australians had to prepare for a serious decline in living standards as the resources boom gives way to falling export prices and a slump in new mine development.
He warned that we were facing “a perfect storm”, which is pushing down the prices of the three commodities which have done most to boost exports in the past seven or eight years: iron ore, thermal coal used in power stations, and metallurgical coal used in steel-making.
The fall in interest rates will ease the current pressure on home-buyers and business, but it will require far more to address the serious structural problems facing our economy.
The present government, which is beholden to the Greens, seems incapable of addressing the problem. The question is whether the opposition will come up with a credible rescue plan.