http://money.ninemsn.com.au/article.aspx?id=621156
Shadow.
Mark Westfield
August 26, 2008
The big questions ahead of next Tuesday's official interest rate cut are:
Has it come too late to prevent the economy going into recession?
Will the sharemarket respond positively?
Will it stem the slide in the housing market and thus help restore shattered consumer confidence?
Perversely, the answer to all three is probably 'yes'.
Once the economy starts to slow, it will take months for a stimulus like a rate cut — or more likely a series of rate cuts — to set in train the circumstances that will point the economy forwards again. A quarter or even half percent rate cut will, however, begin to improve sentiment.
The best investors move six months to a year ahead of changes to the real economy. The rate cut is being factored into share prices and the market has had good 'tone' over the last fortnight since the Reserve Bank of Australia (RBA) admitted it had made a mistake by not moving to cut rates two or three months ago. It is now desperately seeking to ease monetary conditions — while trying to appear cool and calm as if nothing happened.
Smart home buyers, for instance, will sense that it is a matter of time before falling rates start to stimulate property values and will move to take advantage of soft housing prices in the meantime.
The gap between the turn of sentiment and the recovery of the real economy will provide cashed-up buyers of homes, cars, consumer goods and services with excellent opportunities over the coming months. However, the great majority of the community will suffer over those few months as the lagged effect of the RBA's two rate increases, in February and March, continue to cause deterioration in retail spending, bank lending, employment and the economy generally.
Sentiment, confidence — or lack of it — and timing are everything in Western economies. In the midst of a downturn of the scale we are experiencing, a change in sentiment is subtle and difficult to pinpoint. It usually occurs once that small proportion of buyers — those who are able to move quickly — decide the worst is over and begin to buy before signs of recovery become more obvious. That is, the signs start showing up in Australian Bureau of Statistics figures.
The sharemarket is the best crystal ball. For the first six months of 2008 investors had been pricing industrial and financial shares for a recession at the end of this year or early next. This may still well be the case. Gloom, doom, pessimism and a sense of helplessness in the face of a global liquidity squeeze and an insensitive and ignorant RBA pervaded the market.
But with the market bouncing along above and below the 5000 mark of the ASX 200, investors are on the sidelines searching the horizon for signs of recovery. Once they can fix the timing of the turnaround to six, eight or 10 months hence, they can start to buy seriously.
At the moment the market is in a holding pattern while investors interpret the forward looking statements of chief executives and chairmen during this reporting season for those signals. Most of the corporate commentary is cautious. The fall in the oil price off its July high of US$147 a barrel and the 11 percent drop in the Australian dollar are also positive contributors to those looking to time their re-entry into share, property or retail markets.
In the meantime, Canberra has become a sideshow while the Rudd Labor Government prepares to push the raft of new taxes contained in its first budget through a sceptical and hostile Senate. Labor ministers who spent 11 years in Opposition frustrating the previous government's initiatives, are now accusing the Liberal-National opposition of irresponsibility in signalling concerns with taxes on alcopops, expensive cars, and Western Australian condensate designed to raise around $6 billion a year.
The theatre illustrates how little budgetary — or fiscal — policy matters in influencing the state of the economy. Whether the surplus is $22 billion or $16 billion is likely to be of little consequence.
Both sides have treated fiscal policy cynically as a means to buy votes come election time. The Liberals did it, and Labor has been, and will be, no different.
While the politicians play politics in Canberra, the RBA is left to manage the economy. Drawing its influence from the politicians, it has done a very poor job so far in 2008.
Now it has finally seen the light and plans to cut next week — and it should be a minimum cut of a full half a percent to try to bring about a soft landing for the economy — the RBA may introduce the catalyst that will spark the first flickerings of a slow recovery, first in sentiment and then in key housing and consumer markets.
The night is always darkest before the dawn, they say. For most, conditions will remain difficult and the ABS data — by their nature backward looking — show a slowing business and consumer environment for a few months yet.
But those fortunate to have cashed out last year, or not get caught in the various 'sucker rallies' during 2008, there is light in the tunnel. Caution will still be the byword though, because a further shock from the US, or even China (unlikely, but that's what shocks are about) and the flicker of light may prove to be a train coming the other way.
*Mark Westfield is a Director of C|T Financial and a financial commentator.
Shadow.
