Schizoid RBA minutes

The following is the domestic economy section of the Minutes on Monetary Policy released today. Any regular reader of MacroBusiness will be unsurpised by the PROCESSION of negatives noted during the meeting. Indeed, we might have written these notes ourselves over the past two months.

In total, it’s a very negative assessment of the economy that is gleefuly accepted in the name of one item: “A strong pick-up in business investment remained the central element in the medium-term outlook.”

Let’s hope it materialises.

According to the national accounts, GDP had increased by 0.7 per cent in the December quarter, to be 2.7 per cent higher over the year. This was in line with expectations at the time of the February meeting. The initial effects of the Queensland floods on economic activity had been evident in a fall in coal production in the December quarter. Members observed that the national accounts had shown significant differences in the pace of growth across sectors and regions. For example, growth in output in the retailing and manufacturing sectors had been relatively soft over the preceding year, whereas growth in a range of service sectors had been quite strong.

The extreme weather events across Queensland and elsewhere were complicating the interpretation of the economic data for the March quarter. While domestic demand appeared to be expanding at a solid pace, production in the quarter had been significantly affected by the natural disasters. In particular, liaison with the Queensland coal industry suggested that delays in removing water from the coal mines were leading to a slower recovery in coal production than had previously been expected.

The household sector continued to exhibit restraint in spending, with the household net saving ratio remaining around 10 per cent in the December quarter. Retail spending had recorded modest increases in the first two months of 2011, consistent with the staff’s liaison with retailers. Consumer sentiment had declined recently to be only modestly above long-run average levels. While there was considerable optimism among households about prospects for the broader economy, members noted that consumers were less positive about their own finances. Conditions in the housing market remained subdued, with housing prices down slightly over the first two months of the year and auction clearance rates a little below average. Consistent with this, growth in household credit had remained well below the average rate of recent years, and housing loan approvals had fallen in January and February. Residential building approvals had weakened in early 2011, with the fall concentrated in apartments, especially in Victoria, where there had been very strong growth in 2010.

The recent business indicators showed a somewhat mixed picture. Survey-based measures of current conditions were mostly around average, while forward-looking measures had picked up to be above average. Imports of capital goods had been trending up and business credit had risen in February, the first increase in nine months. Overall borrowing conditions remained tight, though liaison with larger businesses indicated that there had been some improvement in the availability of finance.

A strong pick-up in business investment remained the central element in the medium-term outlook. Members again discussed the very strong outlook for investment in the resources sector, particularly in gas. Members noted that a major challenge was whether the economy could accommodate the expected high rate of investment without undue pressure on costs. Outside the resources sector, growth in investment was expected to be relatively modest. The appreciation of the exchange rate was weighing on trade-exposed sectors such as tourism and manufacturing, and subdued consumer spending was affecting prospects for investment in the retail sector. In contrast, with office vacancy rates in the two largest cities projected to fall to quite low levels, a pick-up in commercial property construction was expected over the next couple of years from the current low levels.

Employment growth was estimated to have slowed from the rapid pace seen in the second half of 2010. The unemployment rate had, however, held steady at around 5 per cent, suggesting that the reported slowing in employment could be overstated. Forward-looking indicators pointed to a continuation of employment growth over the months ahead, but at a more moderate pace than seen last year.

There had been little new data on wages and inflation over the past month. Liaison with firms suggested that wage growth was increasing in mining-related industries and some skilled occupations, though pressures in the labour market had not become widespread. Recent data suggested that higher fruit, vegetable and petrol prices would significantly boost the CPI for the March quarter.

David Llewellyn-Smith
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