Inflation rises, manufacturing still struggling, shares slide: Economy roundup

Today’s monthly inflation gauge from TD Securities and the Melbourne Institute has provided a surprise for economists – inflation actually rose in January, due to rises in utility, pharmaceutical and transport costs.

The gauge increased 0.8% in January, a sharp turnaround from the 0.2% fall in December. The rise brought the annual inflation rate to 2.7%, up 2.2% last month.

But TD senior analyst Joshua Williamson says the rise is due to one-off cost rises that usually occur every January.

“The January result for the inflation gauge is unlikely to discourage the RBA from cutting the cash rate by 100 basis points at its board meeting tomorrow,” he says.

“The increasing severity of the global recession, the pending collapse in business investment in Australia and the prospects for further price moderation strongly suggest that tomorrow’s rate cut will not be the last for this cycle.”

Manufacturing struggles

Australian manufacturing activity contracted for an eighth consecutive month in January, according to the Australian Industry Group/PricewaterhouseCoopers Performance of Manufacturing Index.

The index rose a seasonally adjusted 2.9 points in January to 36.6, but remains below the 50 point threshold separating growth from contraction. Eleven out of 12 sectors recorded contractions in activity, with food and beverages picking up due to seasonal consumer demand.

The measure of production gained 3.7 points to 33, up from a record low in December, but no sectors reported increases in output.

Business investment set to fall

Business investment is also expected to fall over the next 24 months due to the downturn, according to forecaster Access Economics. The group says the value of total investment projects in the December quarter totalled just $607.2 billion – a 5.8% decline from the previous quarter.“A downturn in investment had certainly been on the cards… the rate of business investment relative to output had moved to an unusually high level,” director David Rumbens said in the group’s latest Investment Monitor report.

“A number of major projects have been shelved over the past few months. The result is likely to be a sharp fall in business investment over the next two years.”

Projects shelved include Shell and Anglo American’s $5 billion coal-to-liquids development and BHP Billiton’s $6.3 billion Olympic Dam expansion.

Rumbens also said while the Government may increase its investment, this may not offset further falls in businesses investment.

Shares weaker

The Australian sharemarket opened 1.3% lower today after poor leads from Wall Street last week. The benchmark S&P/ASX200 was down 39.9 points or 1.13% to 3500.8 at 12.00 AEDST.

Commonwealth Bank shares lost 1.9% to $26.38 while BHP Billiton lost 3.1% to $29.55. NAB fell 1.3% to $18.68 and Woolworths slipped 1.2% to $27.38.

The dollar also lost ground to US63 cents – the lowest point since November.Chinese leaders positive

Overseas, Chinese Premier Wen Jiabao says that he sees signs of a recovery of Chinese economic activity.

“During the last 10 days of December it started to get better. The goods piled up in port started to decrease and the price of industrial products started to rise,” he said at a business meeting in London.

The Premier also told <The Financial Times that China is also thinking over further economic stimulus. “We may take further new, timely and decisive measures. All these measures have to be taken pre-emptively before an economic retreat,” he said.<

China’s economic growth dropped to just 6.8% in the December quarter. According to official figures, the country has also dropped into a deficit of around 111 billion yuan after entering December with a 1.2 trillion yuan surplus.