You may have heard of the ‘two speed’ economy. Well if you haven’t, then you certainly will over the course of 2010. More specifically the phrase reflects a view that resource states like Western Australia and Queensland will power forward over 2010 and beyond, underpinned by strong demand for commodities from China. By comparison, states like NSW and Victoria may experience far slower growth rates.
Certainly the Reserve Bank Governor has made no secret of his belief in the ‘two speed’ economy. Glenn Stevens was quizzed on the topic when he recently provided testimony to the Parliamentary Economic Committee and his comments were unequivocal. It is worth focusing on exactly what he had to say on the topic:
“Yes, I think it is going to be a two-speed economy. I have said publicly that I think all those issues of geographical differences and industry differences are likely to re-emerge with a vengeance, if we take as our predicating assumption that the story is that Asian, Chinese and so on demand for resources continues to be strong, that those parts of the world continue to grow, that our economy naturally will want to adjust to those changes in relative prices. That is how it presents to us. The relative price of resources is high, that of manufactures is low.
“There are structural adjustment implications of this for our economy, and we have said this. We cannot make the structural adjustment occur, actually, and we cannot really make it any easier. It is going to be prompted, as we were talking about earlier: wages and conditions in some sectors will get higher because they want to attract the workers, other sectors will not be able to match that and the people are going to move. The exchange rate is high. What that does is put pressure on import competitors, manufacturers and so on, and some of our demand for those products gets spilled abroad to cheaper areas. That is how the economy copes with these things. So the structural adjustment issues are there and they will, I think, probably intensify in the years ahead if this scenario pans out. It may not, of course—something else may go wrong. But I think those issues will be quite important ones. I am not going to be able to provide you, though, with any answers. They will not go away unless the initiating set of forces in Asia goes away, so the economy will, one way or another, adjust to them. The issue for policymakers, governments in particular, is how to make that adjustment work easily and smoothly. I do not think you can really resist it.”
The implications are far reaching. Certainly it will make it harder to set monetary policy. But it also means that manpower and investment will be dragged from states like NSW. And those companies that are in high growth regions will thrive. It may also mean that investors end up spending more time looking at where companies are headquartered than in the past. But overall the RBA Governor is saying that it won’t all be clear sailing for our economy in coming years – China represents good news for some, challenges for others.
The week ahead
After the barrage of economic events that ushered in autumn, activity eases somewhat in the coming week with around half a dozen events scheduled.
On Monday, the Advantage (formerly Olivier) job advertisement figures are released while on Tuesday, NAB releases its latest business survey and ANZ releases its job ad data. Consumer sentiment and housing finance figures are released on Wednesday while Reserve Bank Assistant Governor Philip Lowe also presents a speech entitled “Future Directions in Finance”. And on Thursday the latest unemployment figures are issued.
Overall the data releases should prove extremely interesting. Job ads recorded solid gains in late 2009 but fell sharply in January. Businesses and consumers are confident but aren’t spending freely at present. And housing finance has been solid up to December when loans slumped. The main outlier is employment where there have been strong gains in employment over the past five months. Still, even with the jobs report, weakness has crept in with the number of hours worked down in the latest month.
To the forecasts, and we think it’s likely that job ads rose in February in line with survey and anecdotal information. It’s likely that seasonality played havoc with the January data and we think that it also affected the NAB business survey. So business conditions probably lifted in February with confidence steady.
In terms of consumer confidence, the Roy Morgan survey has spiked sharply higher in the latest week. Despite the strength in the latest reading it is likely that the higher interest rates will make consumers more wary.
But on a more positive note housing finance probably rebounded by around 4% after slumping by 5.5% in December. Rising home prices are serving to generate more activity with some budding buyers fearing that they will be priced out of the market unless they buy.
We are expecting another solid jobs report also. Employment probably rose by around 15-20,000 with the unemployment rate reasonably steady near 5.3-5.4%. One indicator to watch is hours worked. More jobs may be created but unless hours worked rises then the overall economy won’t grow.
Turning our attention overseas, generally the US economic calendar is well stocked with key indicators. But not in the coming week. The modest collection of indicators due for release comprises trade data on Thursday and retail sales and consumer sentiment on Friday.
The international trade data barely attracts a response from investors, but for the record a deficit around US$40.3 billion is tipped In January, little changed from the December shortfall.
There will be far greater interest in retail sales data for February. Overall economists currently expect a flat result, but once autos are excluded, sales may have lifted 0.2% in the month. The other indicator to watch out for is consumer sentiment with economists tipping little change in the index in March.
While there are few indicators for release in the US, in China it’s a different story. On Wednesday export and import figures are issued while retail sales, production, investment and inflation figures are all slated for release on Thursday. The National People’s Congress also meets over the week. China is Australia’s major trading partner and the Reserve Bank has made no secret of the fact that activity in China is crucial to monetary policy settings here in Australia.
Sharemarket
The first anniversary of the bull market is now upon us. Between March 3 and March 10 in 2009 sharemarkets across the globe hit multi-year lows. But almost as one, sharemarkets lifted from those lows and the uptrend has been in place ever since. Certainly markets have paused for breath along the way, including now, where markets are generally in a sideways trend. From the lows, the German Dax is up 59%, the US Dow Jones and UK FTSE are both up around 57%, the All Ordinaries is currently up around 52% and the Japanese Nikkei up 45%. Sharemarkets should resume their upward trends once jitters about Greece ease.
Interest rates, currencies & commodities
The on-again/off-again preparations for parity parties may be back on the agenda again. The Aussie dollar is again perched above US90 cents, underpinned by a strong economy and recovering global growth. In addition most observers still believe that a US rate hike is still some ways off. That means that Australia will maintain a solid interest rate differential with the US over 2010. Admittedly the Aussie has almost 10 cents to go to reach parity with the greenback, but it certainly remains a ‘live’ issue. And looking at the currency more broadly, the trade weighted index stands at just over 70, not far off the 25-year high of 74, set in July 2008.
If there was one month of the year that the Reserve Bank would be less likely to lift rates, what would it be? Answer: June. Of the 57 discrete rate changes that have occurred since 1990, only once has the Reserve Bank changed rates in June. Interestingly it was a rate hike, back on June 5, 2002. The Reserve Bank has changed rates twice in January, but as it doesn’t meet in the month, rate moves are less likely in January unless something dramatic is happening. The two months that are most likely for rate changes are November and December – in both these months rates have been adjusted eight times in the past. And as for the coming rate meeting in April – the Reserve Bank has changed rates five times during the month of April – the only rate hike occurring in 2000.
Craig James is chief economist at CommSec.
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