Trouble in the economy spells another RBA rate cut

In little over a week the Reserve Bank will meet and decide on official interest rates.

The decision will have symbolic meaning beyond the immediate technical implications of cheaper home loans or lower yields on retirement income.

If the Reserve cuts by 25 basis points – taking us to a 3% cash rate – the broader translation will be that 2013 is going to be a year of low confidence and low growth, meaning lower interest rates.

A rate at 3% would be the lowest cash rate since 1990: it hit 3% as an emergency response in April to September 2009. So how bad are things that the entire market expects us to go to 3% next week?

Lately I’ve been seeing factors that could spell trouble for our economy and suggest a rate reduction before Christmas.

Firstly, growth. The November minutes say growth was above trend at the start of the year but has slackened in the second half. The Reserve does not want to wait too long to see how far growth might weaken, and is likely to reduce rates if it feels the growth forecast is getting worse.

Because China and Japan have slowed industrial output – and their importing of our coal and iron ore is such a large part of our trade performance – you can expect these factors to hit our economic growth.

We also have a problem with productivity, which was once a driver of Australia’s economic growth.

Secondly, employment. For many quarters our unemployment stayed in a range envied by the rest of the world. However, the unemployment rate has started to rise from its 5 to  5.5% levels.

Some of the building approval and house price data in the second half of 2012 is slowly rising and should be fuel for some confidence, but they have not been dramatic upturns. And these sorts of measurements go directly to confidence.

Moreover, confidence has proved stubbornly low in 2012 despite interest rates being at historic lows.

And this week the markets will get data on Australian capital expenditure – a very good indicator of business confidence. A poor result will almost certainly push the RBA to cut.

Of course, we are a middle power in the economic sense, so when the Reserve sets the cash rate it has to balance domestic factors with the international. And some of those international elements have not looked good lately. France, for instance, had it’s government debt downgraded by Moody’s this week, and US unemployment seems fixed around 8%. The Chinese economy has slowed.

I predict a December rate cut of 0.25 percentage points as an early counterweight to slackening growth and rising unemployment. However, if the Reserve still wants to read the December CPI before committing to a rate cut, then the cut will come in February.

Whether it’s December or February, I believe there is evidence of a mild slowdown in Australia’s economy and the Reserve Bank will have to cut rates.

Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.