Yesterday Deloitte Access Economics released its June 2013 issue of Business Outlook. The link to the media release regarding this is here.
Interesting to read that it makes the comment that the Reserve Bank has both the motive (a series of challenges to growth prospects) and the opportunity (inflation very low) to move interest rates lower. More important is that, whether or not rates are cut, they’ll stay low for some time. When you add in the notion that pretty much every sector of the Australian economy is now in cost cutting mode and that whilst the gap in the ‘two speed’ economy being reduced, this is due to a narrowing in ‘speeds’ from worsening prospects for strong sectors rather than strengthening prospects for weak sectors.
Whilst very low interest rates can drive the capacity for companies to borrow, low interest rates also enable many companies who should be insolvent to keep clinging to life. This only protracts the pain for many suppliers/creditors to these companies as the longer these sick entities trade the worst off everyone will be when they finally do tip over. Previously with ‘normal’ interest rates the financial contraints on these companies were quickly identified and their cashflow impacted.. not now.
These sick companies also continue to compete with healthier rivals and unsustainably drive down costs as they strive to win work. This undercutting by already loss making companies only further harms the industries in which they operate. Profitable companies struggle to win work as they have a need to maintain a margin and so the adverse impact increases…
An economy needs a health level of corporate failure to redistribute resources to those participants that are better in business (question what is a healthy level??).
The better the good businesses perform the better off we all are