Economy suffers on multiple fronts

Australia’s domestic economy is being buffeted from all sides as the waterfront dispute worsens, Asia’s crisis becomes entrenched, and negative sentiment threatens to further damage consumer and business confidence.

Whilst there is no doubting the seriousness and potential impact of both the wharf dispute and Asia, consumer confidence as a result of their combined effects is likely to become a self fulfilling economic prophesy.

The National Australia Bank’s (NAB) latest economic outlook confirms an imminent downturn in economic activity largely due to an erosion of confidence, and whilst we cannot disagree with that aspect of the report, we still cannot fathom their prediction for an increase in interest rates of 1.5% in 1988/9.

The Reserve Bank has stated that it will not alter monetary policy to support the currency, and if economic growth is to slow in line with the NAB’s forecast, the last thing the economy will need is an increase in rates.

Dunn and Bradstreet’s quarterly business expectations report indicates that business are forecasting an increase in cost pressures, but this is not unusual. The key is whether the cost pressures will translate through to annual inflation figures.

Inflation and wage pressures might seem the likely triggers to the NAB’s prediction, but these would also seem unlikely to break out to such an extent that the RBA would need to tighten monetary policy.

Clearly the financial markets are not factoring in any rate increase; in fact the exact opposite is the case. The only scenario that we see that might trigger a bond market fall is an upset in the forthcoming election and a change of fiscal policy as a result.

Further reductions to the budget deficit as a result of tight policy and ongoing asset sales, especially from the balance of Telstra, will help maintain market optimism on this front.