The Reserve Bank decided to leave Australian official interest rates unchanged at 4.75% following its most recent meeting in October. The meeting did however signal a change in position for the RBA, with its concerns over inflation having lessened and the outlook now considered to be more consistent with the 2%-3% inflation target.

The latest commentary increases the possibility of an interest rate cut as the next move by the Reserve Bank to stimulate domestic demand given the continued weakness in the United States and European economies. In fact, the Australian bond market has priced-in nearly 50 basis points worth of rate cuts in the next 12 months.

The US Federal Reserve also remains committed to maintaining the target range for the federal funds rate between 0%-0.25% until at least midway through 2013 in an ongoing effort to aid the country’s struggling economy and alleviate fears of a possible double dip recession.

Source: Reserve Bank of Australia, United States Federal Reserve Board

The Australian economy posted 1.2% growth in the June quarter, following on from a revised growth rate of 0.9% in the March quarter. Much of this rebound had been anticipated by economists following the downward impact on growth posed by the natural disasters experienced in Australia earlier in the year. The June quarter growth includes a contribution from Queensland flood recovery expenditure. However, over the year to June, the Australian economy expanded by just 1.4%.

The unemployment rate fell to 5.2% in September, after reaching a 10-month high of 5.3% in August. The decrease in the unemployment rate was a result of total employment rising by 20,400 in the month, over double the forecasted rise. Skills shortages remain an issue for the resources sector, continuing to add upward pressure to wages.

Looking ahead, we can continue to expect the Australian economy to be split into two speeds, with the mining sector and related industries continuing to experience high growth and other industries, particularly the tourism, education and manufacturing industries, struggling to cope with subdued consumer spending and the strengthening Australian dollar.

Other economies around the globe have been the source of much uncertainty.

In August, the United States narrowly averted financial collapse after a lengthy stalemate in Debt Ceiling negotiations, and even after an agreement was reached there remain fears that the economy could head back into recession, with President Obama’s latest jobs plan being blocked in the Senate. Standard & Poors downgrading of the US’s credit rating from AAA to AA+ also had an unsettling effect on global markets.

Sovereign debt remains a concern in Europe, with debt issues that had previously plagued Ireland, Portugal and Greece spreading to other countries in the region including Italy and Spain. In addition, French banks have experienced credit ratings downgrades due to their exposure to these countries. At the recent G20 summit in Paris, European officials outlined their strategy for tackling the crisis which included additional funding from the EU and the IMF, establishing a backstop for banks and writing down Greek bonds. However, debt concerns continue to see high levels of volatility on the financial markets on a daily basis.

The Chinese economy has continued to grow strongly, although at a slightly slower pace (9.1% p.a. in the September quarter relative to 9.5% p.a. and 9.7% p.a. in the preceding quarters). China’s slowing growth in addition to a growing global supply of commodities has caused commodity prices (and the Australian dollar) to fall over the past two months.

In the near term, there are some key dates that need to be monitored. Firstly, an EU summit is scheduled to be held this week to determine whether a resolution can be reached in relation to the eurozone sovereign debt crisis. Then, the Reserve Bank will be keeping a close eye on inflation data due out 26 October 2011 to determine whether there is any scope to cut interest rates in the next few months if global conditions do not improve. Expect continued market volatility for the next three to six months, at which time there will hopefully be greater certainty regarding medium-term growth prospects.

If you require any consultancy advice on the implications of the current economic and financial climate on your organisation, please contact Gavin O’Donovan, Senior Consultant on (07) 3831 0577 or gavin@aecgroupltd.com.