Is Australia’s economy suddenly spluttering? A SmartCompany Q&A

After what most commentators have described as a weak Christmas trading period, entrepreneurs have returned to work in 2011 to a run of worrying data releases about the Australian economy.

Retail sales, new home sales, building approvals, surveys of manufacturing, construction and services – every result has shown an economy finishing 2010 with a whimper, and starting 2011 in much the same way.

But does the data point to a tough year ahead, or will Australia’s economy bounce back as the year goes on?

Time for a SmartCompany Q&A.

You’re going to ruin my New Year buzz, aren’t you?

Um, yep. But it’s not my fault. Since the start of the year we’ve had a pretty average set of economic data releases.

Okay, take me through it.

First up was new home sales – down 0.2% in November, leading to predictions that sales were likely to stall for most of 2011.

Then came the Australian Industry Group’s performance indexes for the manufacturing, services and construction sector. All three industries ended the year below in contractionary mode, hit by weak consumer confidence, the high Australian dollar and rising interest rates.

Then there were building approvals – down an ugly 4.2% in November, reinforcing fears about the outlook for the residential building sector.

Yesterday we had retail sales, which rose just 0.3% in November after falling 0.8% in November. According to CommSec, annualised retail sales growth is at 1.3%, which is “the second worst reading in more than five years and a far cry from the decade average growth of 6%.”

Okay, okay, I get it. Anything else?

Unfortunately, yes. The floods in Queensland will of course have a devastating short-term effect on that state’s economy, while there are also just faint signs that the job market might be slowing. The Advantage Job Index recorded the biggest monthly fall in 18 months in December, following a weaker result in November.

The labour market is still clearly tight, but perhaps not as tight as many had thought.

What’s sapped the economy’s momentum?

Interest rates. The RBA’s surprise decision to raise interest rates by 25-basis points in November to take the official cash rate to 4.75% was designed to slow the economy down and that’s exactly what it’s done.

Whether the rate rise served it’s other purpose – putting the brakes on inflation – remains to be seen.

So have economists started revising their growth predictions?

No. The strength of the mining sector means there is no need to drop growth forecasts, which currently sit at about 3.75%, indicating growth slightly above long-term averages.

But therein is the big problem for the economy and the RBA.

With the mining sector growing strongly, inflationary pressures will emerge and that will force the RBA to start raising interest rates – perhaps as early as the second quarters of this year.

But rising interest rates will have again impact many of the sectors clearly spluttering – most notably retail, construction, parts of the services sector, exports and residential property.

So when does these spluttering sectors start firing again?

Probably when interest rates are seen to have peaked (or at least stabalised) and when consumers start to feel confident and secure enough to start spending again. Economists differ on when this is likely to be – some say later this year, but with the rates outlook hard to read there are of course no guarantees.

For the short-term at least, patchy conditions are likely to continue into 2011. Entrepreneurs need to be alert as they put their New Year growth plans into action in the coming months.