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Cash rates do the round trip to 3.0% on slowing growth

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Cash rates do the round trip to 3.0% on slowing growth

Yesterday, the Reserve Bank of Australia cut their cash rate to 3.0%, down from 4.75% at October 2011, and the lowest level since mid-2009. Data points from manufacturing, the job market and the terms of trade are not cheery reading – all pointing to weaker GDP growth – and we expect the cash rate to fall further in 2013.

Released on Monday, the Australian Performance of Manufacturing Index shrank for the ninth consecutive month in November, declining by 1.6 to 43.6. Innes Willcox, chief executive of the Australian Industry Group, warned “the key concerns for manufacturers remain the high dollar, rising energy costs and weak demand in export and local markets. These factors are exacerbated by the ongoing slump in the residential and commercial construction sectors. In each of the past eight months the production, employment, exports and new orders sub-indices have all declined”. It sound like manufacturing in Australia is on its knees!

Meanwhile the job market looks to be softening with Australia’s unemployment rate at a two year high of 5.4%. Admittedly, it is well below the 34 year average unemployment rate of 7.0%.

The graph below however shows the Roy Morgan unemployment rate (right hand side), which uses a less stringent definition of “unemployed”, has shot up toward 10.0% in the past year.

Supporting this thesis is Andrew Bassat, CEO of Seek Limited, Australia’s clear market leader with 70% share of the jobs ads. At their Annual General Meeting held last Thursday, Bassat said there had been a consistent but gradual decline in total ad volumes since 30 June 2012.

Finally, Australia’s terms of trade – the ratio of export prices to import prices – are coming off the boil after peaking in the September 2011 Quarter at a 140 year high. The RBA expects Australia’s terms of trade will probably have fallen by about 15% by the end of 2012.

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Chief Executive Officer of Montgomery Investment Management, David has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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