More weak economic data supports case for cuts

Thu, 29 Jan 09

This week saw greater signs of deterioration in the Australian economy with a major bank survey of consumer sentiment showing a fall of 2.2 per cent in January. The data showed that consumers appear very concerned about the impact of the global downturn and what it will mean for Australia's economic outlook over the next 12 months.

Other news out this week showed that Australia is not as well insulated from slowing global markets as previously thought. Mining giants BHP and Rio Tinto have been forced to slash jobs and scale back production as demand for resources from countries like China slumps. Retailer David Jones also announced a profit warning and more companies are expected to follow suit in the next few months. Unemployment is expected to rise further as 2009 unfolds.

This ongoing spate of weak economic data means that the Reserve Bank will have to keep cutting rates in order to support the economy and try and protect it from the worst of the global downturn. The Reserve Bank next meets in early February and rates are expected to be cut by at least 50 basis points. This will bring the official cash rate down to 3.75 per cent.

In the lead up to the meeting, the RBA is likely to take a close look at the next round of economic data which will be released next week. A survey of business confidence is due out on Tuesday and the consumer price index figures will be released on Wednesday. These indicators will provide the central bank with greater insight into just how fast the economy is contracting.

In addition to the upcoming domestic news, market participants will be focused on the extent and type of any fiscal measures President Obama introduces to stimulate the US economy. These will have important implications for the Australian economy because trends in global markets like the US tend to flow through to Australia.