aussie economy slowing

  1. 5,881 Posts.
    Looks like the next rate move will be down, great news for holders of PM's. It was only a matter of time.

    UPDATE: Australian Jobs Disappoint, Rate Rise In Doubt

    By Rebecca Thurlow
    SYDNEY (Dow Jones)--Anemic employment growth in Australia through February and a grim report on housing affordability have cast further doubts over the likelihood of another interest rate rise in coming months.

    Economists said the surprising weakness in the labor market means the Reserve Bank is likely to skip raising rates next month, and rates could stay on hold for the foreseeable future unless housing rebounds unexpectedly.


    Earlier Thursday, the Bureau of Statistics said the domestic economy created just 1,300 new jobs in February, well below expectations of a rise of 20,000.

    The unemployment rate rose to 5.9% in February from an upwardly revised 5.8% in January, exceeding the market's expectation of a 5.7% rate.

    ABN AMRO economist Kieran Davies said the disappointing jobs result will make it hard for the Reserve Bank to justify another rate rise unless the housing market, which has recently shown signs of cooling, stages a comeback.

    "It makes it a lot tougher. The downward revisions to history and the weak rise today suggest it is hard for a compelling case for a (rate) rise at the moment," Davies said.

    Davies is one of a majority of economists who were recently forecasting the Reserve Bank will raise rates one more time, by 25 basis points, in the second quarter.

    Jobs Weakness To Weigh On Confidence, Spending
    Changes to the way the bureau produces the data and revisions to the series from January 1999 onward to incorporate census population benchmarks, accounted for some of the weakness in the data.

    This wasn't lost on Australia's ruling Liberal National coalition party, which made much of the unemployment rate's fall to a now-defunct 14-year low of 5.6% in November. The recent low in the unemployment rate has now been revised up to 5.7%.

    Australian Treasurer Peter Costello told parliament compositional changes could have added 0.1 percentage point to the February jobless rate.

    Prime Minister John Howard told reporters the domestic economy is "powerful and robust" and the rise in the unemployment rate in February was "tiny," while noting it has been under 6.0% since September.

    "We have a very strong employment outlook, fueled and supported by a very strongly growing economy," he said.

    Despite the statistical tweaking, economists view the data as a weak signal from the economy and say it will likely weigh on consumer confidence and spending.

    National Australia Bank head of market economics Tony Pearson said the labor market is cooling surprisingly quickly in response to what is likely to prove to be a rate-hike-inspired slowdown in the economy in early 2004.

    The Reserve Bank raised its target cash rate by a total of 50 basis points in November and December, taking its target cash rate to 5.25%.

    The Australian dollar sold off after the jobs data, dropping to a low about US$0.7412 from US$0.7493 prior to the release of the report, encouraged by a weaker euro.

    The debt market rallied, pricing in a diminished chance of another rate rise. The three-year bond futures contract rose about nine basis points to a 94.86 high.

    TD Securities strategist Stephen Koukoulas, who is one of a minority of economists who have been saying for some time that rates will stay at 5.25%, now says it won't take much more softening in jobs for interest rates to fall.

    "As the housing construction boom tails off, so too will the bulk of the jobs created in the last year," said Koukoulas.

    "My initial thoughts were that an easing might be penciled into the December quarter 2004. It might be earlier," he said.

    Housing Key To Rates
    A more popular view among economists is that the Reserve Bank retains a tightening bias and will closely watch coming data as it decides whether to raise rates to 5.5%, which is considered to be a more neutral rate.

    "It still hinges though on whether there is any sign of a housing bounce back," said ABN AMRO's Davies.

    Another report published Thursday showed housing affordability in Australia for first home buyers dropped 8.4% to a record low in the fourth quarter of 2003, driven by house price and interest rate rises.

    The Commonwealth Bank/Housing Industry Association report said housing in the quarter was 23.7% less affordable than a year earlier.

    The Reserve Bank has been eager to stem the rapid rise in consumer credit in Australia, particularly for housing, and most measures of Australian housing activity now suggest the key economic sector is cooling off.

    The Bureau of Statistics' latest housing finance report, due Friday, is expected to show the volume of home loans fell 3.0% in January, after a 0.8% fall in December.

    However, the Reserve Bank will be more interested in what has been happening in the sector in recent weeks.

    "On that score, all we know is the auction clearance rates, which are still quite depressed, so I think it is quite tough for them (the Reserve Bank) to construct a case (for another rate rise) from here," he said.


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