The solid data keeps rolling on

 

In the past month or so, the news in the run of Australian data has been universally above expectations.  GDP, jobs, retail spending, building approvals, credit, exports and house prices are all on the up… well, for the recent data at least.

Admittedly, many on the economic indicators are coming from a poor starting point – recall the 4.3% GDP result followed 4 straight years where growth had been 3% or less and building approvals had been dismally weak for years before yesterday’s 27% spike.  But there is no doubt the economy has held up better than most thought.

The reasons are not clear.  A mix of influences including prior monetary policy easing, what was a flat to slightly weaker Australian dollar, some spending of the carbon price compensation or even the satisfaction of some pent up demand could all have some impact.

Whatever the reason, the positive tone to the economic news will dissuade the RBA from cutting interest rates too aggressively at least in the short term.

That said, the inflation outlook remains skewed to the downside and the RBA is likely to over-achieve on its inflation target for the next year or so.  That is, inflation is likely to chug along well below 2% for some time (abstracting from the carbon price effect).  This means that further interest rate cuts remain squarely on the table, although I now think that the RBA will cut only 25 basis points in August (after a low June quarter CPI) but it is still be on a path to a 2.5% cash rate but not until the first part of 2013.

In addition to low inflation, the world economy remains extremely fragile, the main budget tightening is still being felt and the Australian dollar rise of recent weeks could, if sustained, come back to constrain activity.  These dynamics will encourage more rate cuts in the months ahead.