Paul McIntyre: Australia's economy befuddled

Australian economists might do well taking up street-sweeping this weekend because few profess to know what is happening to the Australian economy.

As of yesterday, all their fabulously complicated forecasting algorithms were stuck up a dry outback gully.

You might recall the Reserve Bank of Australia last week tipped a teaspoon of nitro in the interest rate engine, lifting the cash rate 0.25 percentage points to 5.5 per cent.

Boy, did it get a response.

The single biggest decline ever in consumer confidence was recorded last weekend as a small army of researchers worked the phones for the Westpac-Melbourne Institute Consumer Confidence Index.

It was a sharper fall than after the 1987 stockmarket crash, the 1990 recession, September 11 in New York and the Bali bombing in 2002.

Independent economic advisers Access Economics called Australia the most "interest-rate-sensitive nation in the world", and little wonder.

Household debt has increased to more than 140 per cent of disposable income, and the Reserve Bank says interest payments rose to a record 9.3 per cent of household disposable income in the September quarter.

So, within three days of the first interest rate rise since late 2003, the punters have hit a big red rock, their confidence levels plummeting 16.6 per cent. Unsurprisingly, home borrowers are feeling the most volatile - their optimism slumped 20.2 per cent, although, as media heir Lachlan Murdoch demonstrated on Tuesday, the high rollers are still romping around real estate.

Murdoch and Sarah O'Hare sold their Sydney Harbour waterfront pad on Tuesday for A$20.7 million after paying A$18.5 million in November for outright ownership from the then part-Murdoch family-owned Queensland Press.

The Pt Piper pad was the eighth Sydney property to top A$20 million since the threshold was broken in 2002. Despite all the nervous nellies now emerging further down the property ladder, the top end housing market continues to fire.

It holds little comfort, though, for the Federal Government and anyone with an economics degree.

The calls were everywhere for the Reserve Bank to delay another interest rate rise, tipped for April 6, as soon as the Westpac consumer study was released on Wednesday.

At that stage there must be egg sliding down the face of the central bank's assistant governor, Malcolm Edey, who was out the day after the rate hike arguing the case with this line: "For the household sector, the Westpac-Melbourne Institute survey reports sentiment at close to record levels. In fact, this strengthened towards the end of last year and into the early part of 2005."

Edey's argument slipped to the bottom drawer on Wednesday afternoon, although the forecasters got all puzzled again on Thursday when one day after consumer sentiment plunge, markets were stunned by the fastest jobs growth on record - 20,000 were created in February and 230,000 since August last year, the highest number in any six-month period since the Australian Bureau of Statistics started the measurement.

Suddenly economic experts were arguing the Reserve Bank's case for another rate rise on April 6. In truth, no one had a clue this week. This weekend might help to clear the mind, but since the Reserve Bank lifted rates 10 days ago there have been four weak economic indicators released and two more upbeat: productivity, retail sales and business and consumer confidence came in below expectation while building approvals and house prices showed some resilience.

The big dilemma for the Reserve Bank is that demand is growing faster than Australia's productive capacity, which is manifesting in a record current account deficit and a critical shortage of skilled workers.

The whole economic roller-coaster put Prime Minister John Howard and Treasurer Peter Costello on the defensive again this week about their ability to manage these emerging economic flashpoints. Even Costello, one of the better tap-dancers in politics, acknowledged on Wednesday that the consumer confidence index result was an "extraordinarily strong reaction".

Howard is now facing pressure to drop "non-core" promises in last year's A$66 billion election splurge but the Prime Minister, himself a Federal Treasurer in the Fraser Government, was having none of it.

"There is no point in pretending that you can preside over an economy for nine years or more and expect that every single statistic is going to be positive," he said. "It can never be and it will never be. In the months and years ahead there will be other statistics that will be more negative than we would like. That is all the more reason we should keep a sense of perspective."

Sage advice, perhaps, except economists aren't buying it.

"Unbelievably strong jobs growth does not fit with unbelievably weak GDP," Macquarie Bank's Rory Robertson mused publicly. Robertson's only comfort this weekend is that another 100,000 money minds are playing with the same puzzle.

* Paul McIntyre is a Sydney journalist