It doesn't take long for some to forget what is actually going on with the improvement in retail figures, a couple of days after the overdue interest rate cut, leading to some experts to suggest the easing phase could already be ...
It doesn't take long for some to forget what is actually going on with the improvement in retail figures, a couple of days after the overdue interest rate cut, leading to some experts to suggest the easing phase could already be over.
It's tempting to let bush economics take pre-eminence over what theory has taught us but fortunately the Reserve Bank is a captive of the body of thought that economists hang their hats on.
One of the central tenets is that monetary policy works with a lag and so the slowdown we have seen over 2011 hasn't just been the side-effects of tsunamis, cyclones and floods — the finger prints of the RBA's interest rate policy are all over it.
And so it should be because that was the intention and it was constructed that way because the central bank's board, along with Treasury, expected the terms of trade to keep surging, business investment in the pipeline to keep gushing and economic growth to be strong.
It was always a trade-off based on the fact that the Bank couldn't control the externally determined demand but it could do a lot to the local stuff.
The case was actually shown on the very day that retail figures for September came in up 0.4 per cent after jumping 0.6 per cent in August. However, numerous retail segments are still experiencing deflation — so they might be selling heaps but at much lower prices.
It gets worse for the services sector, which is the country's biggest employer, with the October reading of the Australian Industry Group/Commonwealth Bank performance of services index dropping 1.5 points to 48.8, which means the sector is in contraction with a number less than 50.
More worrying is the fact that this sector has been in the shrinking zone for 14 out of the past 18 months.
But wait there's a lot more.
Building approvals collapsed by 13.6 per cent in September with approvals falling in five of the six states and NSW — the biggest state — slumping 32.2 per cent. For those interested, SA saw a 11.3 per cent rise.
Economic theory has shown that the housing sector is a critical starting point for economic recoveries and that's why the US recovery has been so slow in coming. The sub-prime mess and the oversupply of housing are proving difficult to beat.
CommSec economist, Savanth Sebastian, summed it up neatly: "Clearly this adds further weight to our view that the housing sector is going backwards," he said. "Coupled with the fact that house prices have now fallen for nine months and new home sales are holding at 11-year lows and it provides further justification as to why interest rates needed to be cut."
To manufacturing and the AIG/PwC performance of manufacturing index went to a four-month high of 47.4 in October but the reading is under 50 and so, like services, this sector is contracting too.
By the way the TD Securities-Melbourne Institute monthly inflation gauge rose by 0.1 per cent in October and that shows we do not have an inflation problem.
Now that was only a week's worth of data and it conclusively shows that one rate cut won't be enough to breathe life into our economy.