Australian Economy Continues to Tank

The monthly performance of manufacturing index released today fell to a new record low of 32.7, well below the dividing line of 50 that separates expansion from contraction. Highlights from the report:

• Recent results reflect an accelerating loss of consumer and business confidence, driven by worsening news on the global economy, falling household wealth, and the weak housing sector. This climate is being reflected in falling demand for manufactures.

• November’s fall in the Australian PMI® reflects declines across all components of the index. Production fell for the sixth consecutive month and more strongly than in recent months. This reflected the ongoing decline in new orders, which fell rapidly and for the seventh consecutive month. In line with the easing of production,employment fell for the ninth month in November.

• On the positive side, wages growth eased slightly and selling price growth was broadly stable. Input cost growth rose marginally.

• Inventories fell moderately, while supplier deliveries fell solidly. Exports fell sharply in line with the decline in global manufactures trade.

• Manufacturing activity fell in all states with New South Wales the best and Tasmania the worst performing states.

Also released today, the TD securities Melbourne Institute inflation gauge which showed a drop of -0.6% in November, the biggest decline in six years. That brings the year to November reading down to 3.0% from 5.0% just a couple of months ago. Some comments from the TD securities:

''The substantial turnaround in inflation fundamentally changes the economic and policy outlook," Joshua Williamson, senior strategist at TD Securities, said in a statement. "The previous inflation problem has been turned on its head."

Actually, for anyone paying attention inflation was never a problem. As mentioned back in March, inflation is a lagging indicator and the stagflationary conditions being experienced 6 months was just the transition from inflation to deflation.

So market pundits were busily rushing about like lemmings forecasting up to 125 basis points of cuts at tomorrow's RBA meeting and rejigging their estimates of where the cash rate may end up in this cycle. The market has been well ahead of these fools already forecasting a cash rate of 2.75% by May of next year.



My own forecast of a cash rate of 3% now looks like it might be on the high side as the RBA comes to grips with the realization that they will be dealing with deflation in 2009 rather than inflation.