Fed: Cashed up, but not a smile in sight

AAP General News (Australia)
02-13-2009
Fed: Cashed up, but not a smile in sight

By Colin Brinsden, Economics Correspondent

CANBERRA, Feb 13 AAP - Policymakers can throw around as much money as they like in
attempts to restore confidence, but if people think they are about to lose their job,
it could count for nought.

This week's unexpected 4.6 per cent tumble in consumer confidence can only be described
as disappointing given the Reserve Bank of Australia's (RBA's) additional 100 basis point
rate cut this month and the federal government's promise of further cash handouts.

Even more worrying, business confidence slumped to below levels recorded in the 1990s
recession with last year's first $10.4 billion economic stimulus package having given
only a fleeting lift to sentiment.

Worst still, both surveys of confidence were issued before the announcement of a larger
than expected jump in the unemployment rate to 4.8 per cent - the highest level since
mid-2006.

The jobless rate is now nearly a full percentage point above the 34-year low of 3.9
per cent set last February, but is only at the beginning of an expected climb to 7.0 per
cent next year - a loss of 300,000 jobs.

Other data showed consumer unemployment expectations rose by a further 1.3 per cent
to a 26-year high in February - the second highest reading since being tracked in 1974.

Of course, without the rate cuts and the cash injection from the government, sentiment
could be even more dire.

The Senate, after much haggling between the government and cross-bench parties, finally
passed the latest $42 billion package on Friday.

But if consumer confidence remains weak because people fear their job is on the line,
they are less likely to spend money, which means businesses can't operate, which means
they are likely to shed staff - a vicious circle.

The RBA has tried to break this circle, slashing interest rates by a staggering 400
basis points since September.

"In a normal environment, a cash rate of 3.25 per cent would be very stimulatory,"

Macquarie Bank senior economist Brian Redican said.

"But if people are in this very negative mindset, you probably have to give them a
lot more money in their pockets before they actually stabilise spending."

Financial markets are currently pricing in the risk of another 50 basis point cut in
the official cash rate when the central bank board meets in March, and a potential low
for this rate cutting phase of 2.0 per cent come August.

Late last year, RBA governor Glenn Stevens said the current economic environment is
as much a crisis about confidence as it is about credit.

"By their own yardstick they are almost compelled to keep on cutting interest rates,"

Mr Redican said.

Mr Stevens will have an opportunity to provide some hints on the rate outlook when
he faces his semi-annual grilling by the House of Representatives Economics Committee
in Canberra next Friday.

Commonwealth Securities chief economist Craig James expects a "fascinating" discussion.

"So much has happened since September last year with the global economy falling off
the proverbial cliff and subsequently forcing the Reserve Bank to deliver its most aggressive
easing of policy settings," Mr James said.

"Politicians will want to know how confident Glenn Stevens is about Australia avoiding
recession."

Still, despite all the doom and gloom, and doubts over the effectiveness of stimulus
packages, a major positive has come through in the past week.

First-time home buyers have returned to the housing market in droves to take advantage
of increased grants, cheap mortgages and lower house prices.

Such borrowers made up more than a quarter of new home loans granted in December, the
highest proportion in seven years - the height of the last major housing boom.

In October's $10.4 billion stimulus package, it doubled the first home buyers grant
to $14,000 for the purchase of existing homes, and to $21,000 for newly built properties,
until June.

Whether such demand continues will depend on job security.

But Mr James said it does suggest that house prices are not about to fall into a hole
as some doomsayers have predicted.

"If the increase in homebuyer numbers were being met with only a modest number of listings,
then clearly there would be upward pressure on prices," Mr James said.

"Australia's population is rising at the fastest rate in 20 years, construction hasn't
been keeping pace and the rental market is close to the tightest levels on record - so
the preconditions for higher house prices are in place."

AAP cb/apm

KEYWORD: ECONOMY (AAP BACKGROUNDER)

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