China's economy stabilising, Europe the big risk - RBA

BUSINESSDESK: The Reserve Bank of Australia judges some heat has come out of the Chinese economy and there are signs of stabilisation in the biggest market for Australian resources, according to its latest statement of monetary policy.

In minutes for the meeting this week at which the RBA board surprised financial markets with a 50 basis point cut in the benchmark interest rate to 3.75%, the bank says Chinese exports to Europe and Japan have been weak.

But “a modest expansion” in exports to the US has provided a partial offset and there’s been a pickup in shipments to east Asia.

“Growth in domestic demand in China has eased but there are tentative signs that conditions are stabilising," the statement says.

Growth in industrial production has also stabilised.

The People’s Bank of China has managed to slow the pace of growth without stalling the fastest-growing major economy, which expanded 8.1% over the March year.

At the same time, inflation has moderated, including the price of food, a sensitive issue for China’s population.

“The recent slowing in Chinese GDP growth has mainly resulted from tighter domestic policies, although weaker external demand has also weighed on growth,” the RBA said.

Europe poses the biggest threat to Australia’s economic track.

It said the biggest external risk was “the possibility that sovereign debt problems in Europe could intensify and derail the upswing in the global economy".

The RBA made its 50 basis points cut saying the track of inflation is weaker than expected and a persistently high currency is slowing output growth.

It was the biggest move on the target rate since May 2009 and came after figures showed the consumer price index rose just 0.1% in the first quarter.

Over the next one to two years "inflation will probably be lower than earlier expected, but still in the 2-3 percent range", governor Glenn Stevens said this week.

Australia's economy grew at 0.4% in the first quarter, half the pace expected.

Global growth "is likely to continue at a below-trend pace this year" though a deep downturn isn't occurring, he said.