Economy soft, but end in sight business told

Deutsche Bank predicts falling commodity prices will soften the economy in the first half of this year

Economy soft, but end in sight business told
Economy soft, but end in sight business told

By Anna Game-Lopata | February 17, 2012

Deutsche Bank predicts falling commodity prices will soften the economy in the first half of this year.

In a briefing this week to
over 40 senior supply chain professionals, Deutsche Bank Chief Economist for Australia Adam Boyton predicted Australia’s Reserve Bank will cut interest rates by another 50 basis points over the next two to six months in a bid to protect the domestic economy.

Co-hosted by Logistics Executive Recruitment, the Transport and Logistics Industry Economic Briefing presented Deutsche Bank’s findings on the economic challenges and issues facing the sector in the coming year.

"In my view the economy is sufficiently weak for for two 25-basis point cuts to be appropriate before an improvement as we move towards the end of this year," Boyton tells SupplyChain Review.

Boyton says conditions are being dampened by a mild recession in Europe with data indicating a weakness in key manufacturing indicators.

In the first half, this will impact Australia, with a slowing in contract prices for iron ore and coking coal softening the terms of trade.

"The currency is also having
a significant impact on the economy," Boyton says.

"If we were to estimate a monetary conditions index where interest rates and the currency are distilled into a single number, I think we’d find together, interest rates and the strong currency are having a restrictive rather than stimulatory effect on the economy."

Having said that, Boyton adds given Australia’s fundamentals the currency is fairly valued, but this does not prevent a negative impact on certain sectors such as manufacturing and retail."

Boyton and colleague Cameron McDonald agree the Labor government’s carbon pricing strategy will have a fairly minimal impact on the economy.

"Over the near term the key will be how CPI will impact the second carbon compensation package for consumers," Boynton says.

"We do know that the carbon tax will add to the inflation number in the third quarter. However the Reserve Bank will look through such policy driven inflation readings just as it did for the GST some 12 years ago."

Boyton predicts carbon pricing will have discrete impact in the September quarter due to higher electricity prices.

"This is likely to impact consumer spending and psychology, even though households will be compensated for rising energy prices, I wouldn’t be surprised to see some softening in consumer demand in the third quarter as higher energy bills arrive," he says.

For business, Boyton dismisses the carbon tax as "just one extra thing in the mix" along with higher exchange rates and the general restructuring occurring off the back of the mining boom.

"Mining is really dominating the business investment landscape, which is what you’d expect given rising commodity prices over the past ten years," he says.

"This is related to the increased exchange rate which is putting pressure on other industries like tourism.

"Obviously when an economy goes through such a significant structural change, it doesn’t happen seamlessly and issues of dislocation arise."

While manufacturing is continuing its steady decline, Boyton says the economy has nevertheless performed well.

"Strong growth in the manufacturing sector is not a precondition for a solid economy," he says.

"However given the exchange rate is accelerating the pace of decline in manufacturing, the appropriate thing to do is assess where Australia’s comparative advantages lie and focus on microeconomic reform and lowering business costs," he says.

Boyton adds Australia’s services sector is likely to feature with a greater role along with mining to bolster the economy long term.

In terms of the opportunity for technology to play a role in developing the
economy, Boyton points to the conceptualisation and design of products rather than their manufacture.

"The price of technology tends to fall over time, so the value for Australia will be in the effective use of technology," he says.

Briefing co-host Kim Winter, CEO of Logistics Executive Recruitment says economic trends outlined in the briefing are being reflected in demand for talent across the logistics and supply chain space.

"A key theme of the briefing was the need for companies to achieve better business results from limited resources," Winter says.

"Recent months have seen a spike in demand for finance, continuous business improvement, Lean and Six Sigma executives as major customers seek to improve alignment and efficiencies across their business operations."

Winter adds the expected improvement in underlying economic conditions in the second half of 2012 is supported by the increasing demand to recruit Business Development, Human Resources, Transport Operations, Supply Chain and Operations Executives in coming months.

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