Life in the two-toned economy

The Australian economy is in strange territory, with multiple speeds being recorded in different sectors. The Australian dollar has spurted in the past 2 weeks to now be flirting with parity against the US dollar after months of wobbling around the US90c mark. The surge in recent times is helped by the fact that the US dollar is generally weaker as that economy looks as if it is going to go back and spend more time in the toilet. Our dollar hasn’t shown the same stellar progression against the Euro and the Yen in that same period.

The surge in the value of the dollar has been led by an expectation that we will continue to sustain growth and financial capital, with the belief that pressures in the economy will force interest rates to keep rising.

This is hurting and will continue to hurt the value of exports, dampening some of the gloss for those sectors that are doing better on the back of growth in Asian export markets.

The International Monetary Fund (IMF) in its latest economic outlook published last Thursday says we are in relatively good shape compared to other developed countries, but we lag the average for the world. The IMF expects the Australian economy to grow at 3% this year and speed up to 3.5% next year – but this is behind the pace for the globe (nearly 5%). Asia is sprinting at more than 9% this year, fed by China and India.

Last week’s employment numbers confirm that the effects of job losses and cutbacks in hours never got as bad as the pundits expected it would in the slowdown. We now see unemployment resting at about 5%, with total employment is growing at more than 3%, much faster than what the population is now growing. The effects of the Chinese and Australian stimulus packages have kept the demand for labour strong, especially in mining and infrastructure projects, creating some shortages of skills that will keep cost pressures rising in the economy past the point where the Reserve Bank feels comfortable.

But there are weak spots which show that uptake of economic activity after the effects of the stimulus measures isn’t convincing!
The housing market has weakened – prices have peaked and housing starts are tipped to start falling. Retail sales growth is also patchy, with the strongest parts of the retail market in food retail and eating out. Other sectors – such as department stores and other retailers of household goods – remain in the doldrums, as retailers continue to pump-prime purchases through more aggressive promotion and financing deals. You wouldn’t think that Harvey Norman’s new 5-year interest free terms on goods is screaming of confidence in the outlook!

For those supplying the food market, the recovery continues. The ABS says total food sales for the year to August were ahead about 4.6% over the same time last year, with eating-out picking up plenty of value as more cash is splashed around, which is good news for those servicing those niches. It is still slow with the big end of food retail, with large chains locked in a pitch battle competing on value.
General surprise greeted the Reserve Bank’s decision to keep its foot off the interest rate accelerator for now. But they are clearly sensitive to this delicate balancing act!