Inflation not a threat and another interest rate cut needed: CommSec’s Craig James

On the back of yesterday’s news that consumer confidence has fallen to levels last seen before the November and December rate cuts CommSec chief economist Craig James says Australians “risk talking ourselves into a growth recession”.

“[This is] a period of sub-trend economic growth, which feels in many respects like a recession but doesn’t involve the economy actually going backwards,” says James.

The March Westpac–Melbourne Institute Index of Consumer Sentiment showed a slight increase in housing sentiment but an overall five-point drop in consumer confidence to a level of 96.1, meaning pessimists outweigh optimists.

It also revealed that tenants were a lot more pessimistic (down 10.8%) than households with a mortgage (down 6.8%) and those who own their homes outright (flat).

“Then there is the weak housing market with new home sales at 11-year lows, dwelling starts slumping almost 7% in the December quarter and home loans falling in January,” James says.

“And then there is retail spending – up just 0.3% in January with chain store sales up only 2% on a year ago,” he says.

Adding to the gloom will be the release of new US home sales for February on Friday, which James forecasts will continue “bumping along the bottom” although the annual rate is tipped to rise from 321,000 to 327,000 in February.

To turn things around, James suggests: “Better times abroad would help, lifting our share market, and causing us to re-assess our conservative attitudes.

“Aussies need to focus again on the opportunities, not the risks. And a rate cut from the RBA wouldn’t go astray either. Inflation is not a threat and the economy is stagnating.

“So there are few risks about trimming rates another quarter of a percent. And if conditions started to lift quicker than expected, a rate cut could always be reversed,” he says.

“It gets down to the fact that the majority of Australians live outside the areas that are affected by the mining boom. And in those non-mining areas, the news flow has been overwhelmingly negative, not positive,” he adds.

Commonwealth Bank economist James McIntyre says the consumer sentiment index shows the economy to be “muddling along” at a below-average level, though some parts of the economy remain “very bright”.

“The RBA has recently highlighted the importance of developments in the labour market for the course of interest rates whilst the current level of structural change and economic shocks are rendering other readings of the economy less useful.

“In that vein, there is little new information between now and the April RBA board meeting.  Our expectation is that the RBA will remain on hold in April, with the first-quarter CPI figures (due April 24) the next major marker for monetary policy,” he says.