A rash of grim economic news from Australia on Monday looked to have set the seal on a further cut in interest rates this week and suggested even deeper reductions would be needed if the economy was to avoid recession.
The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday and is widely expected to cut the key cash rate by half a percentage point to 5.5 percent, bringing its easing since September to an aggressive 175 basis points.
"It all emphasizes the importance of having lower interest rates," said John Edwards, chief economist at HSBC.
"If you saw this kind of weakness persisting through the first half of next year you would be looking at rates of 4 percent rather than 5 percent," he added.
Investors reacted by pricing in a greater chance of lower rates in the future with bill futures implying a cash rate of under 4.5 percent by June next year.
Still, a round of poor economic data had already been anticipated by many given the scale of global turmoil in recent months and the Australian dollar escaped with no damage.
Retail sales sank 1.1 percent in September, twice what analysts had forecast and the biggest drop since April 2005.
Adding to the angst was a sharp 1.8 percent fall in national house prices in the third quarter, a hit to household wealth already battered by sliding share values.
"Given the wall of worry the consumer has been climbing over the last few months, weakish retail spending is not surprising," said Michael Blythe, chief economist at Commonwealth Bank.
"Things are unlikely to get better in the near-term with concerns about the economic outlook and the labor market weighing down on the consumer side of things," he added.
A sign of what might be in store for the labor market came from Australia and New Zealand Banking Corp's monthly survey of job advertisements.
That showed a steep 5.9 percent drop in October, the sixth month of losses and the biggest fall since early 2001.
Su-Lin Ong, a senior economist at RBC Capital Markets, said the figures suggested unemployment would likely rise to between 5.5 and 6.0 percent by the end of next year, from just 4.3 percent currently. Government data on jobs is due out on Thursday.
"This will keep confidence, spending and borrowing under pressure, and almost guarantees a further weakening in Australia's growth pulse," said Ong. "We expect the RBA to cut the cash rate to the historic low of 4.25 percent by mid-2009."
On the positive side, there were signs that inflation was set to recede more quickly than many anticipated, giving the central bank plenty of scope for remedial rate cuts.
A monthly gauge of inflation from TD Securities and the Melbourne Institute showed a 0.2 percent drop in October, the first fall in almost three years.
Annual inflation slowed to 3.9 percent, from 4.5 percent in September, the first dip below 4 percent since January.
"The gauge signals quite starkly the speed at which the inflation problem of the last few years is unwinding," said Joshua Williamson, senior strategist at TD Securities.
"The momentum is such that inflation is on track to reach the RBA's target range by the middle of 2009," he added.
Such an outcome would be a huge relief for the RBA since it had predicted inflation would not return to its target of 2 to 3 percent until late 2010.
Oil Prices Sink On Bleak U.S. Economy
Crude prices tumbled Wednesday following a raft of bad economic news and growing stockpiles of unused gasoline that suggested demand for energy has continued to erode.
Light, sweet crude for February delivery fell $3.63 to settle at $35.35 a barrel in a shortened day of trading. Prices fell as low as $35.13 just before the market closed for the holiday.
It was the ninth straight day that crude has fallen.
Investors expecting more evidence of slowing U.S. energy demand got a bit of a surprise as the Energy Department reported crude inventories dropped last week.
But Americans continue to cut back on driving amid the worst recession in a generation, leading to growing stockpiles of gasoline and eroding demand for motor fuel.
Gasoline futures plummeted below 80 cents a gallon.
"I don't see anything out of this report that's really going to change this downward move," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. "Things are going to remain under downside pressure through the balance of this year and probably into the new year."
A steady stream of dismal U.S. economic and corporate data during the past few months has hammered investor confidence and sent oil prices reeling 74 percent since July.
More bad news emerged Wednesday with consumer spending falling for a fifth straight month in November, the longest weak stretch in a half century, while incomes declined under the weight of massive job layoffs.
Separately, new claims for unemployment benefits rose more than expected last week, as layoffs spread throughout the U.S. economy, more evidence the labor market is weakening as the recession deepens. The Labor Department reported initial requests for jobless benefits rose to a seasonally adjusted 586,000 in the week ending Dec. 20, from an upwardly revised figure of 556,000 the previous week. That's much more than the 560,000 economists had expected.
"Until we see an economic stimulus plan that gives us confidence, it's gonna be hard to see our way out of the current downturn," economist Mary Kay Plantes told CBS News Radio.
Manufacturers are slashing energy use as well. Orders at U.S. factories for big-ticket manufactured goods fell again in November, reflecting further setbacks in the battered auto industry and a big drop in demand for commercial aircraft.
For the week ended Dec. 19 crude inventories fell by 3.1 million barrels, or 1 percent, to 318.2 million barrels, which is 9.1 percent above year-ago levels, the Energy Department's Energy Information Administration said in its weekly report.
Analysts had expected a boost of 1.5 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.
Gasoline inventories rose by 3.3 million barrels, or 1.6 percent, to 207.3 million barrels, which is 2.4 percent below year-ago levels. Analysts expected stockpiles of the motor fuel to rise by 900,000 barrels.
Demand for gasoline over the four weeks ended Dec. 19 was 2.7 percent lower than a year earlier, averaging nearly 9 million barrels a day.
In a separate weekly report, the EIA said natural gas storage levels in the U.S. tumbled last week but remain 3.4 percent above the five-year average for this time of year. The EIA said natural gas inventories held in underground storage in the lower 48 states slipped by 147 billion cubic feet to about 3.02 trillion cubic feet. Analysts had expected a drop of between 142 billion and 147 billion cubic feet.
Oil traders so far have brushed off attempts by OPEC to boost prices through production cuts. The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, said last week it would slash production by 2.2 million barrels a day, its largest single cutback ever. The most recent round of cuts would reduce OPEC production by more than 2 million barrels per day.
OPEC may meet in Kuwait City on Jan. 19 to discuss further production cuts. The group's next official meeting is March 15 in Vienna.
The fall of benchmark crude on the Nymex has been paralleled by steep declines in Brent futures traded on London's ICE exchange.
Trader and analyst Stephen Schork noted that Brent crude has dropped "in 79 of the last 123 sessions ... by a total of $108.05 a barrel" - a 73 percentage point loss.
On Wednesday, February Brent crude slumped $3.75 to settle at $36.61 a barrel on the ICE Futures exchange.
In other Nymex trading, gasoline futures tumbled by 6.3 cents to settle at 79.27 cents a gallon. Heating oil plunged 12.8 cents to settle at $1.1983 a gallon while natural gas for January rose 17.3 cents to settle at $5.91 per 1,000 cubic feet.
Mixed economic trends
THE highest-ever output of cotton, a record rise of 28 per cent in production of rice, some activity in large-scale manufacturing and a big 22 per cent growth in tax revenue have come as good news in the current fiscal year.
But the bad news is that energy shortages persist, external account has weakened and inflation this year is a bit higher than in the last year.
The federal government looks set to present the next fiscal year’s budget on June 1. Finance Minister Abdul Hafeez Shaikh says the budget would be people-friendly but all efforts would be made to increase revenue.
Phasing out of subsidies from power sector continued throughout the current fiscal year to create fiscal space for tackling circular debt that is a key issue in energy crisis. Gradual withdrawal of subsidies coupled with the rise in international oil prices and intra-power-sector circular debt pushed up domestic petroleum prices. And this along with food supply constraints, chiefly due to larger exports plus poor supply chain management continued fuelling consumer inflation. The rupee depreciation due to deterioration in external account also played a part in it.
Agriculture sector performed well. The country reaped cotton harvest of 14.8 million bales—an all-time high and far above the previous record high of 14.3 million bales in FY05. Rice output surged 28 per cent and production of sugarcane also increased five per cent. In spite of abundant supply of raw cotton at cheaper rates, textile export earnings fell 10 per cent in ten months of the current fiscal year. Sluggish market conditions in the US, a double-dip recession in a larger part of Europe, disturbed law and order situation in Karachi and power shortages across the country are blamed for lower exports.
Chairman of All Pakistan Textile Mills Association Mr Mohsin Aziz, however, points out that in April 2012 textile exports went up 10 per cent over March as the industry received five-days-a-week gas supplies on priority basis.
Total export earnings in first ten months remained lower than in the same period of the last fiscal year. The factors that affected textile exports were also responsible for reduction in overall export earnings. Some non-traditional export items, however, witnessed phenomenal growth in earnings. Jewellery exports, for example, shot up more than 100 per cent to $650 million from $315 million. And export earnings of chemicals and pharmaceuticals jumped more than 25 per cent to $909 million. Exporters say full fiscal year earnings from jewellery exports is expected to cross $800 million mark and chemicals and pharmaceuticals may fetch up to $1.2 billion.
Despite these and some other success stories on exports front overall export earnings in ten months fell four per cent to a little less than $19.4 billion whereas imports crossed $37 billion mark with 15 per cent year-on-year increase. Thus, there emerged a very large trade deficit, too large to be compensated by inflows of home remittances. As a result the current account balance also went into red. This, coupled with the drying up of foreign investment and suspension of some foreign aid money (as also $1.5 billion un-disbursed amount due on the US under the Coalition Support Fund), led to a balance of payments deficit.
The deterioration in the external account and heavy external debt servicing caused the rupee to decline against the dollar particularly in the last week of May at the time of IMF loan servicing. Ministry of finance officials, however, point out that the economy “survived gracefully” for two long years May 2010 to May 2012 during which period the country did not get a single dollar from the IMF.
The suspension of the IMF loans and virtual US aid compelled the government to rely more on domestic sources for filling in budgetary gaps.
And despite a handsome increase in tax revenue generation it had to borrow excessively both from the central and commercial banks.
Excessive government borrowing from the central bank contributed to inflationary pressures and its heavy reliance on borrowings from commercial banks crowded out the private sector to some extent. But an uptick in credit demand on the back of increased activity in agriculture, a small recovery in large-scale manufacturing and expansion in some services’ sub-sectors including wholesale and retail trading doubled the off-take of private sector credit. (Between July 1, 2011 and May 11, 2012 banks’ net lending to private sector stood at Rs235 billion against that of Rs108 billion in the same period last fiscal year).
During this period, net government sector borrowing from the banking system (both from the central bank and commercial banks) crossed a trillion rupees mark from Rs506 billion in the same period of the last fiscal year. One of the key reasons for this enormous borrowing was that the federal government made a one-off ‘debt-consolidation’ of Rs391 billion to reduce the volumes of circular-debt. If this borrowing is taken into account the fiscal deficit in nine months of the current fiscal year comes to 6.1 per cent of GDP—far higher than 4.3 per cent recently reported by the ministry of finance.