It’s starting to get pretty lonely in the Australian bear camp. Gerard Minack has a note out this morning backing away from rate cut calls (though he sees an extended period of rates at current levels) and has pushed out his concerns about a mining investment cliff to 2014:
Our base case is another year of lackluster growth for Australia, but near-term risks are moving to the upside. The growth outlook is balanced between the well-known restraints on domestic activity – fiscal tightening, high currency and structural change – versus
the slower-than-usual response to prior rate cuts. However, there are now tentative signs that easier monetary policy is gaining traction. Consequently, we now expect the cash rate target to remain on hold for the foreseeable future (we had previously expected two rate cuts in 2013).Forward indicators improve. Both business and consumer sentiment have bounced in recent months, albeit from low levels (Exhibit 1). Several series have improved in early 2013: house prices, retail sales, consumer sentiment and economic expectations. Consumer sentiment can be erratic, but a sustained improvement would point to higher spending (Exhibit 2). Job ads have also bounced in line with better business sentiment, suggesting better labour market data ahead. Difficulty adjusting for seasonality may be at play around this time of year. However, enough leading indicators have improved to suggest that policy easing is now getting traction.
We expect the RBA to be on hold for an extended period. We believe the key medium-term issue for the RBA is the outlook for business investment. Our view is that the peak in mining-related investment is relatively close but investment will not fall sharply over the coming year. Put another way, the downside risks associated with the end of the mining-related investment boom are concentrated in 2014-15, not over the coming year.
This is actually pretty close to my own view. As an iron ore analyst I reckon that the economy will be hit with another income shock some time in the second half of the year so that brings my concerns for the economy forward a little. I agree rates are on hold until either unemployment rises, which is unlikely to be material in the first half given the turn the ANZ series, or investment declines more sharply.
So, not so lonely after all.
