Laminar Group’s core economic view is that global growth will gather pace through 2013 and that the improvement will extend into 2014 largely on a self reinforcing cycle of growing business and household confidence feeding stronger spending and in turn promoting even greater confidence. One assumption that is key to our view is that persistently low inflation will allow central banks to maintain very accommodative monetary conditions well into the recovery. Our central bank policy assumption seemed a very solid one until the release last week of the minutes of the US Federal Reserve’s policy meeting held on 29-30th January that revealed discussion about whether the Fed should start to reduce its securities purchasing program which could represent an earlier-than-expected reduction in so-called quantitative easing (QE).
The QE discussion in the minutes makes Fed Governor Bernanke’s comments in his semi-annual testimony to the House Financial Services Committee on Wednesday (US time) particularly important. The semi-annual statements have in the past often provided information about shifts in the Fed’s economic views and potential policy changes.
We believe on the basis of earlier speeches and statements that Fed Chairman Bernanke is more committed to allow QE to continue until economic recovery is on much stronger footing than many of his colleagues. One headwind to US growth that Chairman Bernanke has emphasized is the impact of sharp cuts to government spending. Later this week, automatic across-the-board US government spending cuts totaling $US85bn are scheduled, enough to cut annual US GDP growth by around 0.6 percentage points. It seems more likely to us that Fed Chairman Bernanke will try and reduce rather than affirm market uncertainty about QE ahead of the potential automatic government spending cuts.
If any doubt has arisen temporarily about the likely course of US monetary policy, locally the Reserve Bank of Australia (RBA) has been working to make the likely course of Australian monetary policy a little clearer. Both the minutes of the 5th February RBA policy meeting (that left the cash rate unchanged at 3.00%) and RBA Governor Stevens’ parliamentary testimony late last week made the point that earlier cash rate cuts may be starting to gain traction lifting domestic spending and current below long-term average borrowing interest rates are appropriate.
Looking beyond the next few months, the RBA is watching how the potential gap in economic growth from the peaking of the mining investment boom may provide space for non-mining investment domestic spending to grow faster. With the RBA forecasting inflation staying within target band over the next two years the next most likely policy response to an unchanged cash rate is further easing if needed to support domestic spending. Our view remains that quite rapidly rising household wealth and rather better than expected company profits in the current reporting season augur well for an imminent improvement in household spending. In short, further cash rate cuts will not be needed, although it will probably take data readings through to mid-2013 to prove the point.
In the very near term the market may focus on the Q4 private new capital expenditure (capex) report to be released later this week. Actual capex in Q4 will probably be less important than the survey of future capex contained in the report which apart from showing revised capex plans for the current 2012-13 financial year, will also provide a first estimate of planned capex for 2013-14, a key reading to help assess how far mining investment may pull back.