It remains our view that the RBA will potentially need to ease rates further in the second half of the year. This is based on the still many challenges the economy must face over 2014 and the years following.
Despite recent encouraging data flow in some sectors we think it is premature to forecast rate rises this year as some are now doing. This is because we have seen very little of the decline in the mining investment cycle that is imminent.
Further there are few convincing signs of recovery in the non-mining economy outside of the housing sector.
Indeed we suspect that if rates were to be raised in the second half a resulting higher dollar would weigh on the recovery in non-mining sectors; the housing recovery would not deliver in terms of growth; and renewed pressure would be exerted on households.
The primary reason we think forecasting hikes in 2014 is premature is because we have seen almost nothing of the decline in mining investment. We have little feel of how exiting the largest mining investment cycle will pan out. Nor over what time frame it will occur.
The declines in mining investment to date have almost all been in machinery and equipment, which is import intensive not employment intensive. Building and structures investment has not yet declined nor has associated employment.
As it does decline, when projects are completed, job losses will start to mount, potentially in the tens of thousands this year alone.
The point about equipment versus buildings is an especially good one.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
