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 MARKET REPORTS |
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Economic commentary
Mining boom teeters
November 28, 2007
Dr Ron Woods, Econoclast
In the past week the futures market has slashed by more than half the probability of another rate rise at
the next available opportunity, February 7th. Instead I reckon a better bet is a rate cut sometime in
2008. At this stage, the RBA have no idea whether they will raise again. They won't know that until
after the publication of the next CPI in late January, which has been the pattern followed for the last
five hikes. The excuse they have used for these five rate rises is "to restrain spending" flowing from
the Resources Boom. As the RBA Governor said in August if that external stimulus from the
resources boom "were not there, then I think the economy would look quite different and quite
possibly monetary policy would be doing something different as well". Yet there is some evidence from Metal and Perth house prices that this stimulus could already be waning.
Both metal prices and Perth house prices have reached dizzying levels. However it appears most of the price gains have been reached and when you look at the annual price changes, the gains are abating. These commodities are basically cyclical and it appears the best gains are behind us. With Chinese exports to the US faltering as the US flirts with recession, metal prices may start to show no or negative annual price gains; the stimulus from the Resources Boom (maybe also Perth house prices) and the RBA’s rates excuse will teeter.
Today more data from the Mining industry also suggests the same. The following chart shows the annual change in a variety of indicators of the Australian mining industry, including income from sales, profits, employment and capital expenditure. They all appear to suggest the big gains are behind us and therefore that stimulus is waning.
The Resources Boom is said to be the stimulus to spending that is driving the RBA into raising
interest rates. But as that stimulus wanes that spur to spending will keep fading and the RBA's rates
excuse will teeter.
Unfortunately if it keeps raising rates because it thinks there is a continued
stimulus, then the risk of overkill on rates is setting the stage for a classic policy mistake. Recessions
usually require some bad luck, say a US recession and some home-grown policy mistakes, like too
high official cash rates. When I recently wrote about this I feared a currency-whiplash and since then
the Aussie dollar has fallen around 5 US cents (and that is with a generally weaker US dollar as well).
I have no idea whether this is the foreign exchange market also beginning to think that the official
cash rate will eventually have to be cut or if it is just a coincidence. However this episode could be a
taste of things to come in other Australian asset markets should the consensus start to turn towards my
view that that the official cash rate is too high.
Markets could get quite nasty if this becomes
conventional thinking especially if the RBA insist on pushing the cash rate even higher at their
February meeting. If it becomes obvious they have made a mistake rate cuts would have to occur to
ameliorate an economic downturn but I worry about the likely negative consequences for equities and
the currency should that scenario come to fruition and the RBA's rate excuse teeters.
Dr Ron Woods, regarded as one of Australia's leading market economists, has a knack for being far ahead of the curve in assessing the direction of the economy. With a PhD in Economics, Dr Ron Woods is a well-known commentator on economics and interest rates, and has worked for the Commonwealth Bank, Bankers Trust, NM Rothschild and Challenger. Dr Ron Woods produces the newsletter Econoclast, a fresh look at Australian economic events.
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