On Tuesday, as often happens in the economic world, a range of data with “mixed signals” was released.
The National Australia Bank released its monthly business confidence report. It showed that the mining industry, not surprisingly, had declined greatly in confidence. But while the total business sector remained slightly pessimistic, it was, as a whole, less pessimistic than it had been in April.
You take your positives where you can get them. In May, the NAB survey noted that business conditions lifted solidly in wholesale (up 12 to -4 points), manufacturing (up 8 to -13 points) and construction (up 6 to -4 points). That all three sectors are still in negative (ie pessimistic) territory is a good indicator of how the non-mining sector has been struggling of late.
In May, the dollar came down from US$1.03 to $0.96 and perhaps what might have helped the confidence is the view that it will continue to fall.
Which brings us to the next bit of data: housing finance and interest rates.
Currently, interest rates are at historic lows, which has fuelled some discussion that inflation will follow. Coupled with this is the decline of the value of the dollar which means that the price of imports will inevitably increase.
The fear of inflation from low interest rates is not limited to Australia. In America, Nobel prize-winning economist (and New York Times blogger) Paul Krugman, has spent most of the past three years swatting away suggestions inflation is about to break out in the USA due to government debt and loose monetary policy. Similarly, in Europe, the inflation ogre has stopped Germany from embracing any real fiscal stimulus despite the Eurozone inflation crawling along at 1.6%.
Here in Australia, a couple years ago there were even calls from some economists that we were about to enter a period of “stagflation” – that of high inflation and low (or stagnant) growth. Thus far there is no sign of the former, and only now, some of the latter.
But as the mining sector cools, we look for signs that the non-mining areas are taking up the slack. One sign is an increase in people taking out loans to buy or build houses. Indeed, the very reason during the global crisis that the government temporarily increased the first-home-buyer grant was to boost housing construction at a time when business was reducing construction activity (and it worked).
On Tuesday the figures released by the ABS showed that the housing finance of construction and new dwellings had increased in the past year by 16.7% and total housing finance had increased by 5.2%:
The increase in construction is a good sign, and certainly what you would hope to see with such low interest rates.
So will this fuel a boom in housing prices that will see us experience that same increase in household debt that I noted earlier this week?
At the moment it looks unlikely. Back in the early 2000s, 18 months after the RBA began reducing interest rates, the number of housing loans had increased by 12%, but the value of those loans had increased by 31%. In the 18 months since the RBA started cutting rates in November 2010, the number of loans has grown by just 4.2%, and the value of those loans has increased by only 6.5%.
This would suggest that the Reserve Bank won’t be worrying too much about inflation in the housing market at the moment. And currently the likelihood of the RBA lowering rates in July is 50/50.
Last week the secretary of the Treasury, Dr Martin Parkinson, who also sits on the RBA’s board, told the Senate that the Reserve Bank could ignore any inflation increases from a decline in the exchange rate and could lower interest rates “further and just accept that inflation went out of the band [ie above 3%] for a period”.
There certainly are risks with this – accepting a little bit of inflation can be like accepting getting a little bit pregnant.
But, given the current weakness in the business sector as shown by the NAB survey, the continual need for the dollar to decline to help exports and as yet no sense of a boom in housing prices, it would be odd for the RBA to consider that inflation is currently a bigger concern than general growth and employment.
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