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ECONOMIC UPDATE

After the release of a bout of strong data earlier this year, recent indicators of the domestic economy have come in fairly mixed. At one end, the labour market remains extremely tight with strong gains in the number of people employed and a long-term low of 4.1% in the unemployment rate. Consumer prices are above the RBA’s comfort zone and expectations for further gains in commodity prices (particularly for coal and iron ore) may have a further impact on inflationary pressures. At the other end of scale, consumer sentiment has dropped in line with falling share prices and rising domestic interest rates. This has seen lower growth in home lending and retail spending. These negative factors, combined with slowing global growth, are expected to impact the economy but what are the leading indicators showing?

The latest business investment survey by the ABS shows investment is expected to remain strong over the next year. This is in line with strong business credit growth, currently growing at an annual pace just over 24%. At the same time, job vacancies have been strong and consistent, signalling further gains in employment in the months ahead. One cautionary sign comes from the NAB business survey, which shows business conditions and business confidence have declined in recent months.

Overall, we expect the economy to slow through 2008. At this stage, we expect a soft landing, with growth easing back to the 2.5-3% range, from around 4% now. Meanwhile, the competing forces in the economy have created an uncertain interest rate environment. While the possibility of a further rate hike in May still exists, recent moderation of the tough anti-inflation sentiment previously expressed by the RBA has raised the possibility of having reached the peak of the interest rate cycle already. This would no doubt be a relief to the nation’s borrowers.

Prepared by Steven Milch, Head of Economic Research, St.George Bank