Change is needed to drive the Australian economy and we should start with another RBA cash rate cut: Michael Matusik

The RBA will most likely leave the cash rate on hold at 2.75% today. Rates should fall another 0.25% – as discussed as few weeks back – to make up for the federal ‘fiscal drag’.  

Where Aussie interest rates go from there depends on the direction of the Australian dollar and the amount of new housing construction.  

A high Australian dollar makes it harder for industries like manufacturing, tourism, construction and retail to be competitive.  

Despite the fundamentals for housing being sound – low and falling interest rates, pent-up housing demand, strong and increasing population growth and steady unemployment – new housing starts and new home sales continue to remain weak.  

As a result, the outlook for the Australian economy has lessened, with financial services firm JP Morgan downgrading their earlier forecasts of 3.25% economic growth in 2014, to 2.75% next year.  

This should force the RBA to cut the cash rate below 2.5%.  

At present the non-mining private sector continues to remain on the investment sidelines, and it is very much needed to help fill the void left by the ‘pullback’ in mining investment.  Note ‘pullback’ and not ‘crash’ or ‘collapse’ - but more on that next week.  

I don’t expect any great investment commitments this side of September 14 and for many months after that, to be honest. Confidence should improve post federal election, but by then we will be running into Christmas and besides… things, economically speaking, don’t happen that quickly.  

On a positive note – unless you are a builder - the RBA has little to fear from cost pressures (outside of union action) in the construction sector as building costs fell at their fastest pace in nearly four years during the March quarter.  On an annualised basis, building costs have been growing by just 2%, which is more than half the decade average growth rate.  

New housing construction has a huge multiplier effect across the economy.  It creates lots of jobs.  New housing starts must be stimulated.  Our current political crop doesn’t have the gonads to change the way property is taxed in Australia.  And we don’t have the money in the coffers anymore to take the easy route and cut property taxes such as stamp duties.  

I do note, however, we have a spare $80 million to give Bill Gates.  Now, I am all for having a world without Polio, but surely this type of donation should be coming from the likes of Clive Palmer and other billionaires first.  But I digress.  

The latest Bloomberg survey has 10 out of 21 economists forecasting a cash rate of 2.5% by the end of this year, with Westpac tipping a cash rate of 2.25% and the remainder anticipating no further rate cuts this calendar year.  At the time of writing, only two economists expect a rate cut in June.  

I think the cash rate rate could go as low as 2% by the end of this year.  The baton change from engineering to residential construction is taking much longer than anticipated.  If the Aussie dollar climbs again against the greenback, then all the more reason for a 2% cash rate.  

Given the current state of play the only lever we have to pull is interest rates. I think interest rates should fall today and then again in August – bugger the timing of the election – and then once more in November this year.  

We need to set up 2014 to be a massive year for change down under.

Michael Matusik is the founder of Matusik Property Insights, which has helped over 550 new residential projects come to fruition.  Read Michael’s Blog or follow him on Facebook and Twitter or connect via LinkedIn