{"id":423,"date":"2012-03-27T17:44:02","date_gmt":"2012-03-27T07:44:02","guid":{"rendered":"https:\/\/newsroom.ing.com.au\/?p=423"},"modified":"2016-08-21T04:12:50","modified_gmt":"2016-08-20T18:12:50","slug":"quarterly-economic-outlook-q2-2012","status":"publish","type":"post","link":"https:\/\/newsroom.ing.com.au\/quarterly-economic-outlook-q2-2012\/","title":{"rendered":"Quarterly Economic Outlook &#8211; Q2 2012"},"content":{"rendered":"<p>This ING DIRECT economic analysis draws together recent economic   events with forward looking analysis to provide insight to likely future   direction of interest rates for both home loan borrowers and savers especially term deposit investors.<\/p>\n<p><strong>Economic Analysis<\/strong><\/p>\n<p>The past six months have been dominated by financial events in Europe, although this could be   viewed as a story in two halves.<\/p>\n<p>During the December quarter the European crisis was perhaps at its most intense, with considerable   speculation the EUR currency group would dissolve in a disorderly manner. The March quarter,   in contrast, witnessed a number of positive developments that culminated in breaking the negative   sentiment which heavily influenced markets during the December quarter.<\/p>\n<p><strong>In particular<\/strong><\/p>\n<ul>\n<li> The successful completion of negotiations to release further funding assistance to Greece; <\/li>\n<li> Agreement from bond holders to restructure their Greek debt obligations; and <\/li>\n<li> Agreement across a number of countries to introduce measures to address fiscal imbalances. <\/li>\n<\/ul>\n<p>While none of these measures or agreements were new or unexpected, in fact a number had   been on the table for several months, the real accomplishment was reaching agreement such that   they could be finalised.<\/p>\n<p>A key contributor to the change in sentiment was also the successful 3 year re purchase transaction   executed by the European Central bank in December. This effectively alleviated the near term   funding pressures facing a number of banks. A further transaction was undertaken at end February.<\/p>\n<p>If market conditions require there is scope for a third repo to be executed into the June quarter.   Some commentators argue this assistance, simply, puts off the inevitable for 3 years.<\/p>\n<p>In contrast, we suggest that this provides the markets with a necessary circuit breaker to buy time   for the combination of measures to have a positive impact on broader financial markets. While   there is a risk it may come to same failed outcome, it was necessary to allow time for the other measures to have an impact.<\/p>\n<p><strong>Electoral cycle and Implementation risks<\/strong><\/p>\n<p>The implementation risks on the European rescue   and reform packages are formidable.<\/p>\n<p>Across Southern Europe as a whole, nations   are being forced to introduce significant fiscal   reforms, which have grown out of historical   excesses, in a very condensed timeframe. This is   leading to social unrest.<\/p>\n<p>Combined with the electoral cycle in these   countries, the political landscape is shifting to   right wing nationalist parties. If these parties are   successful, the implementation risks surrounding   these austerity programs will be escalated.<\/p>\n<p><strong>Broader Global Growth Considerations<\/strong><\/p>\n<p>In contrast to the bleak growth that appears   likely for Southern Europe in particular and   Europe more broadly, growth prospects on the   other side of the Northern hemisphere have   brighten considerably over the past several   months.<\/p>\n<p>A wide range of US economic indicators have   surprised to the positive over the period. Importantly,   it appears employment data has begun   to improve, with potential positive flow on effects   to consumer sentiment and spending.<\/p>\n<p>Despite these early positive indicators the recovery   in the US remains fragile; however, it is   gaining momentum at each turn.<\/p>\n<p>Growth in Asian economies has been, to date,   little impacted by European events. To ensure   their economy remains on a solid platform of   7-9% growth, Chinese officials have eased   monetary policy via adjustment to required   reserves.<\/p>\n<p>As the rebuilding efforts gather momentum in   Japan, the increased activity is expected to be   reflected in growth number over the first half of   2012. Despite this improvement recovery in Japan   will still be hampered by fiscal imbalances.<\/p>\n<p>Commodities prices, since the beginning of   the year, appear to turned and broken a clearly   defined downtrend evident from the second   quarter of 2011.<\/p>\n<p><strong>Australian Growth Considerations and   Implications<\/strong><\/p>\n<p>Despite the global volatility over the second half   of last year, domestic economic growth remains   on track.<\/p>\n<p>Reflecting the weakness in Europe consumer   and business confidence eased into year end.   Employment was flat over calendar 2012.   Resources and related sectors continued to   outperform other sectors of the economy. The   number of major new projects, and the quantum   of funds invested continues to increase at a   solid pace.<\/p>\n<p>Although the retail sector struggled in 2012,   broader measures of consumer spending recorded   reasonable growth.<\/p>\n<p>Inflation remains well contained and provides   scope for the RBA to further adjust rates should   domestic demand conditions unexpectedly   deteriorate.<\/p>\n<p>Australia will continue to enjoy impressive   growth in actual, and especially, comparative   terms. While the Europe and the US are expected   to grow at below trend levels, Australia will   continue to evidence above trend growth driven   by ongoing demand from Asia and a recovering   US economy.<\/p>\n<p>Clearly, the high level of the exchange rate is   impacting those non resource related industries   subject to import competition. This is part of   the fundamental shift that is occurring in the   economy as the impact of the resources boom   and high commodity prices transforms the economy through exchange rate linkages.<\/p>\n<p><strong>What does this mean for the RBA?<\/strong><\/p>\n<p>In response to the deterioration in Europe over the December quarter and more importantly prospects   for global growth at the time the RBA cut the official cash rate by 25 basis points in both   November and December.<\/p>\n<p>Despite higher funding charges banks in the main passed on the full amount of decrease to housing   loan interest rates.<\/p>\n<p>At the time the markets feared a deep extended recession in Europe with the potential for a disorderly   unravelling of the EUR.<\/p>\n<p>Reflecting these concerns the market was arguing that the RBA would cut rates by around 75 basis   points over calendar 2012. This is reflected in implied interest rates derived from the interest rate   futures markets.<\/p>\n<p>At its February meeting the RBA noted the combination of the significant improvement in global   sentiment and the impact of previous rate cuts paved the way for the Bank to leave rates unchanged   at its February meeting. These sentiments were echoed at the March meeting.<\/p>\n<p>Subsequent comments from the Bank have underlined their view that the domestic economy remains   strong, although in transition across various sectors. The bank&rsquo;s various comments have seen   markets react strongly and almost completely fully discount the prospect of further rate adjustments.<\/p>\n<p><strong>Australian Interest Rates<\/strong><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"\/media_storage\/economic_outlook_Q2_2012.png\" alt=\"\" width=\"470\" height=\"279\" \/><\/p>\n<p><strong>Interest Rate Outlook<\/strong><\/p>\n<p>In the absence of further destabilisation in Europe and the potential subsequent flow on effects   to the domestic economy, the RBA will more than likely be on hold over the next few months.<\/p>\n<p>There is a possibility that the RBA may reduce the cash rate over the June quarter. This would be   the low point in this cycle.<\/p>\n<p>Over the second half of the year interest rates are expected to be unchanged, with the risk that   as the global and domestic economies strengthen, markets may begin to incorporate higher interest rates into the outlook.<\/p>\n<p><strong>Impact for Borrowers and Savers<\/strong><\/p>\n<p>The immediate prospect of further decreases in   home lending rates has been put on the back   burner.<\/p>\n<p>The combination of significantly higher funding   costs and no decrease in the cash rate by the   RBA resulted in housing loan rates being increased   by about 10 basis points.<\/p>\n<p>The advent of out of cycle adjustment of housing   loan rates is a recent development in the market.   However, this should be viewed in the context of   the continual fine tuning of deposit rates, especially   term deposit rates that has been evident   over the past several years.<\/p>\n<p>In other words banks have started to align the   timing of repricing the asset and the liability sides   of their balance sheets.<\/p>\n<p>Savers have benefitted over recent years as banks   have built their domestic deposit books, in the   face of higher wholesale funding costs in both   the domestic and offshore markets.<\/p>\n<p>This market dynamic will continue into the future   as term deposits emerge as a newly attractive   investment alternative.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>This ING DIRECT economic analysis draws together recent economic events with forward looking analysis to provide insight to likely future direction of interest rates for both home loan borrowers and savers especially term deposit investors. Economic Analysis The past six months have been dominated by financial events in Europe, although this could be viewed as [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-423","post","type-post","status-publish","format-standard","hentry","category-general"],"acf":[],"_links":{"self":[{"href":"https:\/\/newsroom.ing.com.au\/wp-json\/wp\/v2\/posts\/423","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/newsroom.ing.com.au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/newsroom.ing.com.au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/newsroom.ing.com.au\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/newsroom.ing.com.au\/wp-json\/wp\/v2\/comments?post=423"}],"version-history":[{"count":2,"href":"https:\/\/newsroom.ing.com.au\/wp-json\/wp\/v2\/posts\/423\/revisions"}],"predecessor-version":[{"id":667,"href":"https:\/\/newsroom.ing.com.au\/wp-json\/wp\/v2\/posts\/423\/revisions\/667"}],"wp:attachment":[{"href":"https:\/\/newsroom.ing.com.au\/wp-json\/wp\/v2\/media?parent=423"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/newsroom.ing.com.au\/wp-json\/wp\/v2\/categories?post=423"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/newsroom.ing.com.au\/wp-json\/wp\/v2\/tags?post=423"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}