Why rate cuts are a bad idea

Another Reserve Bank Board meeting on interest rates has passed and again it was no change.

However, it comes as plenty of (not all) economists are saying that the next move will be down.

Others, including the RBA’s economic crunchers, along with the likes of yours truly, are hoping another rate cut won’t be necessary but I think it’s a 50:50 situation.

I described the economy as “mixed” but I think it’s leaning towards the positive rather than the negative. That’s why I don’t want any more rate cuts.

You see, if the economy’s run of data turns sour and the RBA’s Governor has to admit his lot got the economy wrong by cutting rates again, I hate to think how the media would treat the news.

Justifiably, they could easily headline their story as “Bad News For the Economy”, which would be bad news for the economy.

Also read: Why Australia is not recession-bound

Headlines don’t tell it all but too many people (consumers and small business owners) only ever see or hear them so it helps the economy if the news is largely positive rather than, as it has been, mainly negative.

The really big problem I worry about is investment undertaken by big organisations, which have peeled back their big spending on capital goods to make stuff to create profits.

This will be a big drag on economic growth and we need this to run at 3% plus to raise employment to KO unemployment, which is now 6.2% and has been for some time.

However, there has been a spike in recent times.

The slowing down of the mining boom, the RBA keeping interest rates too high for too long, which kept the dollar too high for too long, and persistent Labor leadership problems set the scene for a slowing economy.

The Abbott Government’s scare tactics around debt and deficits, as well as a failed Budget that couldn’t get past a dysfunctional Senate, did nothing to help raise confidence and growth.

But it’s not all bad news, so feast your eyes on the following to see why I remain cautiously optimistic about our economy.

This is what rolled out of the economic data story this week:

• ANZ's job ads spiked 3.9%, which was the strongest gain in 15 months. These have risen 14 out of the past 16 months!

• The Performance of Services Index in September came in at 52.3, which was slightly down from last month's seven month high reading but any reading over 50 means the biggest employer sector in the country is expanding.

• Car sales in September were up 6.8%. That was the best ever September and a record 1,143,209 cars have been sold over the past 12 months!

• Meanwhile, we’re getting these good growth numbers, with only 1.9% inflation according to the TS Securities' inflation gauge.

• Retail figures rose 0.4% in August but the state figures make more interesting reading, with NSW (up 0.5%), Victoria (up 0.9%), Queensland (down 0.2%), South Australia (up 0.3%), Western Australia (up 0.2%), Northern Territory (down 0.9%), Tasmania (up 0.4%) and the ACT (down 0.4%). Note that the most populous states had the biggest lifts and even in WA, where the mining boom slide hurts most, there was a rise!

• The NAB’s business conditions index jumped 5 points to +11 in August, after losing a little ground last month, lifting the trend index to its highest level since late 2009! This measures how business is feeling about being in business and in the biggest state, the reading went from a good 9 to 22, which was huge!

• Building approvals are at a record high and these have to promise that there is probably two years of building work ahead, which has a powerful multiplier effect on the economy.

Also read: Why the RBA maintained the cash rate

I think the consumer is getting more confident and this has been the missing link.

I look forward to seeing next week’s business and consumer confidence readings to see if the Turnbull effect was an extra-plus, though there was some scary stock market stuff recently that could have spooked business owners and consumers.

Helping my positivity is the drop in the Oz dollar, which really helps spur on economic growth.

The lower the dollar goes, the more growth I’d expect and you have to remember only last September, 13 months ago, the dollar was 94 US cents, so there has been a huge 26.5% depreciation!

I interviewed the Deputy Treasurer of ING Direct, Peter Casey, on my TV show this week and he basically agreed with me on most of my economic observations.

When I asked him what his bank expected from growth this financial year, he went for “high 2% to 3%”, which is a long way from under 2% and the negative predictions made by some doomsday merchants.

Sure, the economy is not going gangbusters but there are some really nice developments, let’s call them green shoots, which could grow into something really substantial in 2016.

If I’m right, we won’t need any more rate cuts and, for once, I’m backing my old mate Glenn Stevens.

 

Peter Switzer is one of Australia's leading business and financial commentators and founder of the Switzer Super Report, a newsletter and website for self-managed super funds.