Bad News Flows From Headline Data Reliance
The Age
Friday February 1, 2008
Rate rises are fuelling chances of a recession, writes Ron Woods.
THE bursting of the US housing bubble is being widely felt. Reserve Bank credit growth data shows some of that impact here.There has been a surge in refinancing, including among Australian businesses. This has led to a rush to renew and obtain credit lines and caused "total" credit to surge. But outside of this subprime effect on business credit, demand for other credit for consumer-oriented purposes such as "housing" and "personal" continue to weaken under the burden of high official cash rates. This data is another signal the Australian economy continues to weaken. Yet headline data seems to be all the experts seem to care about, which is dangerous.Relying on headline data gives a false impression of underlying conditions in activity and prices. Headline economic activity has been held aloft by the resources boom but that impetus has been waning. Analysis of headline price data has also been a source of error because the RBA's rate rises have become an endogenous source of the price rises the rate rises were trying to stem.Policy mistakes, unnecessary rate rises, with some bad luck, are usually the prerequisites for an Australian recession. An end to the resources boom would be bad luck, and we are likely next week to get a policy mistake of yet another rise in the official cash rate. A US recession dragging down China and others could turn the resources boom into a bust. Fortunately, the US yield curve suggests that the aggressive rate cuts by the Fed will avoid a deep US recession.But that may still not be enough to stop our economy from slipping further as the Australian yield curve remains in dangerous territory. That continues to make the investment outlook for Australian investors problematic, to say the least. Dr Ron Woods is the founder of Econoclast.com.au. He has worked for many years in financial markets. www.econoclast.com.au
© 2008 The Age