The Reserve Bank’s momentous monetary policy changes to be announced at 2.30pm can’t come too quickly as the global economy, led by Europe and the US, heads for deflation and recession thanks to the continuing rise in COVID-19 infections, a new round of lockdowns and the growing fears of political instability in the US after tonight’s election.
This is pretty much a perfect storm for Western economies — with the few “upside risks” (namely, the orderly replacement of Trump by Biden, a rapid vaccine, an end to lockdowns and the widespread fear of infection) still highly uncertain.
Domestically, it’s a very mixed bag at best for the economy.
Remember that the government’s forecasts for a pickup in growth this year and a return to <6% unemployment over the next three years are based on an ambitious “triple 7” set of targets this year: 7% or 7+% growth in household demand, housing construction and business investment.
Construction, fortunately, is looking brighter than feared a few months ago — thanks to the government’s support for first home buyers and renovations.
Building approval and housing finance data for September were the strongest since early 2019, with renovations up 11% (credit where due to Morrison and Frydenberg — HomeBuilder has proved a success despite the scepticism about its impact). And bank lending for homes is up double digits for many banks.
But overall, business investment is weak and showing no signs of recovering outside sections of the mining industry.
And the RBA and Treasury are already worried that the current post-lockdown strength in household demand won’t last heading into 2021.
Annual growth in retail sales has already fallen from 12.2% in the year to June to 5% currently. Coles, for example, saw a 10.7% rise in sales in the September quarter but that slowed to just over 6% in October.
Wage growth is at record lows and falling in some sectors — low inflation (even after the big rise in the September quarter) is the only thing keeping those low reading positive in real terms.
The RBA’s core inflation measures are running at 1.2% and lower on a quarterly basis. Stripping out the impact of childcare costs, higher petrol prices and rises in tobacco and alcohol excise changes, inflation fell in the September quarter and was also negative on an annual basis after the 0.3% drop in the year to June.
The final demand measure of producer prices rose 0.4% in the quarter, but fell 0.4% in the year — in fact they have been falling for all of 2020 (thanks to the impact of weak demand and COVID).
These are clear signs that price pressures are softening alarmingly. There’s more to come — after rising above US$40 a barrel in June and remaining above that for the next four months, oil prices have slumped — down 10% to 11% last week (and another 5-6% on Monday before a late bounce).
That will pull the CPI down in the current quarter, which is not what the RBA wants to see — especially given its new focus on the actual level of inflation and the need for inflation to be sustainably within its 2–3% target band.
There remain critics of the bank who think further easing of monetary policy will have little effect. There are also critics who oppose further easing either because they represent vested interests that want higher rates (think retirees) or because they’re ideologically opposed to easier monetary policy on principle, no matter what.
The argument that further easing won’t do much doesn’t cut it with the bank: it is determined to do everything it can to return to full employment and get inflation back up over 2% — sustainably over.
That’s why we should expect the bank to make one final cut to the cash rate today and take Australia into a new world of quantitative easing. Details at 2.30.
The reserve is printing billions, great, but Morrison is giving the money to the wrong people, the only way out of Morrisons trickle down low wage mess is to give money to those that have to spend, not give it to those that already have too much and don`t need to and wont spend, and talk of increasing/widening the REGRESSIVE GST IS LIKE PUTTING PETROL ON A FIRE TO PUT IT OUT..economic lunatics running the country, DEPRESSION HERE WE COME
Yep nothing much has changed. QE hasn’t fixed the problem of poor wage growth and asset inflation since the GFC. So what are the chances of QE stimulating real economy growth in response to this 2nd major failure of capitalism, we have experienced in last two decades?
Cut to 0.1% and another $100 billion in government bonds over the next six months. Geez. It’s like trying to f**k a blue whale to orgasm with a toothpick.
Here’s another solution: our over-paid, sclerotic, over-paid, ossified, over-paid, complacent, over-paid, unimaginative, over-paid, scaredy-cat, over-paid, feather-bedding, over-paid, guv’mint-nanny-teat-sucking, over-paid, subsidised, over-paid, sheltered workshop, over-paid, lazy, over-paid, passive, over-paid, whiney, over-paid, bonus-self-saturating, over-paid, sooky, over-paid…fatheaded posing waste-of-space spotty-bummed over-paid corporate executive leeches & freeloading Boardroom squatters could…make a decision to DO CAPITALISM.
And…invest. Some money. Invest some of their money for growth. And sustainable profit. Over strategic decades. Without needing their little handy-wandies heldy-weldy by big mummy government policy-wolicy and big daddy RBA monetary incentivey-wentivey.
You know. ‘Capitalism’. You spend money to make more money back. There are endless possibilities for genuine new growth investment, and oceans of cheap capital washing about the globe, desperate for somewhere solid to land. But you need an executive class that isn’t Third Generation Neoliberal Mediocre, clutching tightly to the past, their next quarterly KPI lump, and mummy’s skirt.
Trained to believe that capitalism means never having to take a capital chance.
Exactly Jack, the moral and economic justification for Profit is Risk and Risk taking is the last thing any current Board has in mind when the fix is in.
As for the RBA and Philip Lowe it’s almost as if they are taking a correspondence course in Central Banking written by the FED and BoE where these policies have been such an outstanding success. Success of course being measured by Wall Street and the City as opposed to Main Street. Mervyn King was the last Central Banker I heard who mentioned Moral Hazard as he moved into retirement, now of course all bad loans and decisions of the ‘Too Big to Fails’ are being underwritten by the State and ultimately the taxpayer who’s left as underwriter of last resort.
John, moral hazard and the absence of any risk/benefit and consequence of failure/reward for success metric is killing capitalism as a functional system. Weirdly I think compulsory Super has a lot to with it (as well as the failings to which you allude).
Once you have the government ie the taxpayer underwriting capitalism, you lose its suppleness and ability…and multiplier capacity.
agility
In my observation that was one of the several factors that brought about the collapse of the Soviet Union, new enterprises could be brought into existence but enterprises past their sell by date couldn’t die. Capitalism does provide such a mechanism but even that process has now been corrupted. Some while ago it crossed my mind that here in Oz we are living through our very own version of the Brezhnev years where necessary change and adaptation were being ignored as inconvenient to politically powerful interests. Yes, Super provides, without any effort, an endless stream of new capital funds that simply seem to disappear into financialisation as opposed to Capital formation that builds an economy, communities and the Countries ability to compete and keep up in the big bad world out there. Politically, again in my observation, Oz functions as a Patronage society where Treasury funds are allocated through a corruption of political access to them, Sports Rorts a classic example. The offering and adoption of gas as a post Covid economic solution, when you look at the sheer amount of Treasury grant funding being provided as risk Capital, is another. Mind you age could also be corrupting my mind and judgment as to what it sees in the world.
Capitalism has to some extent relied on regressive tax systems – another way of saying taxpayers underwrite capitalism?
Too true JB. Hopefully It looks as though the whole stinking banking industry is on an irreversible “too big to bail” trajectory.
Hey there is the guy with the tape measure going nowhere again! Good to see Crikey do their bit for recycling!