The business surveys are all pointing to a September quarter slowdown extending across manufacturing, services and construction sectors. Credit growth has almost come to a standstill, while consumer spending remains weak.
The picture is not uniform -- it rarely is -- with jobs growth marking the clearest positive trend. The economy has been generating jobs at a rate of around 30,000 a month since September last year and continued that average in the latest three months.
This largely reflects the underlying population growth, with the unemployment rate bouncing between 5.3 per cent and 5.1 per cent since the beginning of the year.
Employment growth is the result of business conditions three or so months ago, so the job figures do not contradict the weaker trading that business is now reporting.
Forward indicators on employment are mixed. The ANZ's job advertisement series has been rising strongly, but remains 37 per cent below pre-crisis levels. The business surveys point to a weaker jobs outlook in line with falling forward orders and use of capacity.
The Australian Industry Group's series of surveys on manufacturing, services and construction are all in negative territory. The manufacturing index, released on Friday, dropped 4.4 points to 47.3 points, its lowest level in nine months, indicating that the sector is contracting.
New orders, employment and production all dropped.
The matching survey of the services sector has been reporting falling profits and sales for four months, with the next survey due next week. Retail has been weak, but so too has recreation, community services and wholesale trade. The same series shows construction has been contracting since June with home building, commercial construction and engineering activity all experiencing weakening conditions.
The National Australia Bank business survey, which commands the greatest attention from the Reserve Bank, has also been highlighting softer trading conditions, even though its measure of business confidence remains firm.
The number of firms reporting falling orders in August outnumbered those recording increases by 6 per cent, following a slightly larger drop in July. It pointed to weakening employment and increasing idle capacity.
The survey shows the retail sector in dire straits, with the number of firms reporting falling profits exceeding those recording gains by 22 per cent. The sector has more idle capacity than at any time in the past decade. New official retail figures will be published this week.
The latest quarterly manufacturing survey by the Australian Chamber of Commerce and Industry and Westpac showed a sharp deterioration in conditions, with weaker new orders and falls in jobs and overtime. This picture is not consistent with anything like the 1.2 per cent growth rate chalked up by the official national accounts in the June quarter.
Speculation on the reasons for the September quarter slowdown includes the disruption of the federal election, the declining contribution from government stimulus spending and the combined effects of rate rises earlier in the year and a rising Australian dollar.
The Reserve Bank is looking at the horizon, with the mother of all investment booms gathering in the West and China expected to continue powering demand for Australian resources indefinitely.
The history of terms of trade booms is that they bring inflation in their train, as was clearly the case in 2007-08, when underlying inflation rose to just under 5 per cent. It would doubtless have gone higher but for the Reserve's forceful intervention and the GFC.
The Reserve is mindful of the risks to the economy from Europe and the US, but its view, on a balance of probabilities, is that they will not derail the growth of China. "The task ahead is likely to be one of managing a fairly robust upswing. Part of that task will, clearly, fall to monetary policy," RBA governor Glenn Stevens noted in his last speech.
The Reserve Bank believes financial markets take too anglo-centric a view of the global economy, and believe the dynamism of not only China, but also India, Southeast Asia and Brazil is sufficient to offset weakness in the advanced economies. About 90 per cent of our exports are to the rapidly growing emerging world.
It is likely that the bank also regards some softness in the non-mining economy as a natural consequence of the resources boom. Faced with growth of such explosive proportions from mining, other parts of the economy must make way, and the rising value of the exchange rate is a channel for this change.
The news out of China remains positive. Its manufacturing index, matching the one compiled here by the Australian Industry Group, rose strongly in the past month. China's steel production dipped in August but is still expected to show 10 per cent growth from last year, with increases predicted for 2011.
Yet the state of Europe and the US remains worrying. US consumption is weak, credit growth is non-existent and there are financial stability issues looming in the budgets of the US state governments. Fear of default by the most exposed of the European economies may become self-fulfilling.
The emerging world may drive economic growth, but the so-called "BRIC" economies (Brazil, Russia, India and China) still only account for 15 per cent of global output at market prices, compared with 55 per cent for the three big advanced economies.
The International Monetary Fund's verdict, in the concluding statement of its annual review of Australia, was that the capital market turbulence generated by European sovereign debt concerns had generated uncertainty about the prospects for world recovery. "The RBA has scope to wait for the outlook to become clearer," it said.
The Reserve Bank's stance to financial stability concerns is that it should act on the basis of its central scenario, but be prepared to reverse course, as it did in September 2008, if financial market conditions deteriorate.
The trouble with that approach at present is that a decision to lift rates, designed to pre-empt future inflationary pressure, would make business conditions that are already weak that much worse. Any global downturn would be that much harder to manage. Although monetary policy has its full effect with a long lag, it starts biting immediately.
Monetary policy is designed to act on credit growth. The August credit numbers last week hardly make the case for the Reserve Bank to act. They show credit growth is already at its lowest level since November 2009. Total business borrowing fell 0.6 per cent, credit growth to home buyers is close to its all-time low and personal borrowing dropped 0.2 per cent.
