The Reserve Bank of Australia (RBA) will be standing at the middle of the see-saw, wobbling in situ, waiting to decide which way it can run down safely.
Unfortunately, whichever way the RBA chooses, the Australian economy is looking down. The Australian economy will continue to slow regardless.
While there appears to be some stabilisation to property prices in Australia’s major cities, they are modest bounces in comparison to the fastest property price decline in modern history. Prices remain well down from their peak.
The support that is coming into the market is all about the RBA having paused at the last meeting, and expected by many to remain on hold at its meeting tomorrow.
The property market outlook is not just about interest rates however. The reason the RBA is on hold is the serious losses already seen in property, but more importantly the ongoing entrenched slowing of the economy.
Talk of a recession is now far more widespread. We are certainly going to see a sustained drawn-out period of below trend, to flirting with negative activity.
Judo Bank Australian PMI, already in contraction, fell again from 49.1 to 48.1 in April.
The economy is rolling down a hill with no obstacles in the way to stop it.
The RBA has to weigh the risk of economic downside against what remains extreme inflation. The headline may have dropped, but other sub indicators are suggesting inflation may remain stubbornly high for far too long for the RBA’s comfort. The fight against inflation, especially in the services sector is not over yet.
At the moment this is a very tricky see-saw equation, but what may tilt the RBA just that inch more toward remaining on hold, is the continuing deterioration of the global economy, the disarray in the US economy, and now in the latest data, China Manufacturing has moved back into contraction.
So much for the re-opening boom? It may already be over. Some consumer behaviour and travel did get a boost, but Retail Sales fell to just 0.15%.
China was never going to return to boom times for Australian exports post-Covid. Now with increased diplomatic tensions over defence posturing by both sides, there is a risk Australia may be approaching a worrying historic ceiling for China exports.
This all provides a potential ‘out’ for the RBA, in that it can suggest that due to both softness in the domestic economy and un-certainty surrounding the global outlook it will again keep rates on hold. Though with a bias to hike rates further, should inflation remain a problem.
To stop for just one meeting would be a bad look, particularly in light of the damning review of the RBA and the highlighted need for a ‘deeper’ consideration of economic factors in determining monetary policy.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
