Another speech, another reference to the economy being at a “gentle turning point” according to Reserve Bank governor Philip Lowe, who used the phrase in the post-RBA board meeting statement yesterday, which described another cut in the cash rate to a record low of 0.75%.
In remarks he made last night at a business dinner in Melbourne, he found more to be optimistic about:
“The economy has been through a soft patch recently, but we are expecting a return to around trend growth over the next year. There are a number of factors that are supporting this outlook. These include the low level of interest rates, the recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets, and a brighter outlook for the resources sector. Together, these factors provide a reasonable basis for expecting that the economy will remain on an improving trend from here.”
But will it? Lowe’s two public speeches yesterday tell a conflicting story — part optimism, part gloom, with the latter on show when talking about the central issues for the RBA at the moment: the health of the labour market, wages and incomes, and consumer spending.
The rate cut yesterday raises the very real question as to why, with two quick rate cuts under its belt this year, did the RBA give us a third on Tuesday? So for all the optimism of the governor in his statements, there was also a fair bit of gloom and frustration. Wages are not rising, consumers are not spending, unemployment is up and the federal government is hugging its “surplus” and won’t let go because it is bereft of any ideas to help the economy shake off the blues. The government also refuses to help the RBA except for the tenuous benefits of tax refunds that have had no impact at all so far.
The central problem for the economy is the lack of any momentum from consumers. The cumulative impact of weak incomes and wages, leading to weak spending, have whacked the economy since early 2018, and the prescription from the Morrison (and Turnbull governments) has been more austerity and more spending cuts (unless on silly things like defence, or deliberately holding-back spending on things like the NDIS).
The health of the labour market, wages and and weak inflation are also central issues for the bank. The bank knows unemployment and the jobless rate are going to edge up over the next year. The August quarter’s fall in job vacancies, especially in the dominant private sector, tells us unemployment is on the way up, especially with the number of unfilled positions now back to early 2018 levels. Private credit growth hit a more than eight-year low in the year to August. That’s the lowest since August 2011 and came with falls in lending across the board.
It is still too early to say when and where the rate cuts will have an impact, but the fact that a third was added on Tuesday tells us that the RBA is not very confident the first two will have much impact anytime soon, which makes Lowe’s confidence about a return to trend growth in the next year looks tenuous. There’s a chance inflation might make it back to the RBA’s target range of 2-3% over time (it was last there briefly in the June quarter of 2018 with an annual reading of 2.1%, which quickly fell away), but that will only happen if more jobs are created and wages start rising. That’s why the readings from the wage price index over the next two quarters will be vital.
For any hope of inflation to return to the target range, the index has to rise from the current annual rate of 2.3%, and private wages have to grow from the current 2.3% (public sector wages are rising at a rate of 2.5%, despite the caps imposed by various governments).
Judging by what Lowe said in his post-meeting statement and in his remarks on Tuesday night, that is going to be unlikely if “wages growth remains subdued”. And that remains the most likely scenario for the rest of 2019 and into 2020, despite the trio of rate cuts.
I think Mr Lowe needs a new teapot. We have a massive drought and no sign whatever of improvement on the horizon, rather the reverse, a government that refuses to lead or plan and the Brexit bullshit and Trump’s trade idiocy still to deal with.
“Investors fled from risky assets after the Institute for Supply Management’s latest figures showed US factory activity fell to 47.8 in September, its weakest result since June 2009.”
WE can see that US manufacturing has, surprise surprise not improved as a result of the Trumpet’s policies and has in fact reversed. I do not see where Lowe’s optimism comes from.
Based on my trip to Egypt, Italy, France and Singapore just ended, none show the economic distress signs evident in Australia with our endless retail sales, rising shop vacancies and way below emergency interest rates. Yet this Muppet show of a Government continues with the mantra that the economy is on track and the surplus is our saviour when it will most likely be the anchor around our necks that sinks us
I am not sure how you could visit Egypt and not see signs of economic distress. The recent riots against the Sisi government flow from the extraordinary proportion of the population now in extreme poverty – reckoned to be about a third. Having worked there on and off since 2008 and most recently last year my guess is that the potential is there for a new revolution in the range of 2 to 5 years time.
There can only be 2 alternative conclusions to the Muppet government’s inertia in respect of abysmal economic data. 1. They don’t see recession as politically adverse to them because recession punishes the poor and the weak much more than the Muppet’s constituency. 2. They really are just plain stupid.
Just maybe all those stock mantras for the past few decades are due for trade in. Like the one about rising real estate (in reality, land prices) boosting confidence and personal balance sheets. What if we had policies to suppress land values. After a while people would get used to not seeing their well beng as tied up with their house value. New buyers at cheaper prices would be able to buy more furniture and so other stuff. And all those investors could instead invest in something productive.
Maybe we could scrap the Unfair Work Acts and Commission and, word of the week,” nudge”people back into unions and going on strike or making old fashioned logs of claims at a revitalized Arbitration Commission.
There are lots of possibilities. Listening to bankers, even nice ones, for new ways of doing things is not likely to bring forth much.
Maybe it is time for some evidence trained economists to take over from the mantra muppets and teapot theorists currently in charge. Where do they get this stuff? The link between interest rates and house price speculation is well known. Ask those attempting to grow their enterprise of the difficulty in prising investment away from housing speculation at rational cost. Lower interest rates don’t open wallets. Pay off the huge mortgage faster is always a priority for spare cash for current owners. Saving for the ever harder entry into the housing market for new buyers shrinks the spending wallet. The wallet shrinks for those living on their investment income and for the government as more sink into the pension/income support. I do hope the next generation of economic managers are capable of reading evidence instead of the nonsense and tea leaves of the current lot.