Australia Prepares for a Slowdown in Activity

On Tuesday of last week, the Reserve Bank of Australia lowered its cash target rate twenty-five basis points to 3.5% after having reduced the rate fifty basis points just the month before. On the next day, Australia reported that its first quarter GDP had increased 4.34% over the first quarter of 2011, the highest year to year increase since the fourth quarter of 2007, as seen in the attached chart. Reducing interest rates in the face of strong growth is hardly the usual policy of a central bank. But Governor Stevens of the Reserve Bank noted that concern over in the troubles of the Euro Area that had the potential to disrupt the world economy played a significant role in the bank's seemingly paradoxical decision.

The May Business Survey of the National Bank of Australia that was released today shows that the Australian economy has weakened considerably from the first quarter and that an easier monetary policy is not inapprorpriate. The naysayers now out weigh the optimists. The May percent balances of opinion on confidence, business and trading conditions, profitability, employment, export sales, forward orders and inventories are all negative as can be seen in the table below. The survey results shows little expected change in costs and prices, but an expected decline in capacity utilization.

Australia has managed to avoid even one quarter of negative growth since the financial crisis and it looks as if the monetary authorities would like to maintain that record.