Better sentiment towards Australia’s economic outlook over recent weeks has helped to buoy the Australian dollar and prompted a reassessment of rate-cut odds. But has the story changed that much? Not in our view. We continue to see the likelihood of further monetary easing and further weakening in the currency.
Over the past few weeks, there have been the beginnings of an improvement in sentiment towards the Australian economy. Better employment figures, a slight lift in business confidence and a bounce in the iron ore price have all contributed. As a result, expectations of further rate cuts by the Reserve Bank of Australia (RBA) have been pared back, and the Australian dollar has firmed a little.
But have the fundamentals changed all that much? In our view, the answer to that question is “no.”
Our relatively pessimistic view of Austra- lia’s outlook has been based around two central tenets. First, the downswing in the commodity supercycle will continue to cast a very long shadow, and the adjustment to lower commodity prices is a multiyear affair. Second, the so-called “rebalancing” of growth from the mining sector to the non-mining sector will be a rocky path.
Big Picture
Neither of those scenarios has changed. On the first, the bounce in the iron ore price from below US$50 per tonne to US$60 might make for good headlines (a 20% jump!), but it doesn’t amount to much in the context of the downtrend that has brought this price down from US$180 (Display 1). And it certainly is not going to spark the same sort of powerful transmis- sion mechanism—through company tax revenues (and, hence, the scope for broader tax cuts) and through capital expenditure—that was central to the commodity boom phase.
On the second tenet, it is true that employment growth has firmed a bit and that the unemployment rate is no longer shooting higher. But that’s largely a reflection, in our view, of the housing construction upswing. Once that upswing starts to top out, the lopsided nature of the “rebalancing” will quickly become appar- ent. There is still little sign of enthusiasm for business expansion in non-mining sectors (Display 2). A further rise in unemployment seems inevitable.
Potential Pendulum Swing
So what are the triggers or catalysts that could potentially push sentiment back the other way?
In our view, there are four things to watch: (1) a more dovish RBA rhetoric and action, including a potential rate cut on May 5; (2) a poorly delivered Commonwealth budget due on May 12; (3) signs that the housing activity is starting to peak; (4) a job growth disappointment.
Maybe not all four catalysts are required. But, for the record, that’s what we expect, and we see no reason to change our big-picture view.
Source: AB
