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There is a slowly growing vibe that the next move in interest rates in Australia will be up. Perplexingly, money markets are starting to price in higher interest rates for reasons that are paying scant regard to local economic news.
It is a case of the local market reverting to its unthinking, unquestioning attitude to what the RBA tells them in private “Chatham House rule” meetings plus the lead from the US where its strong economy will see the Fed hike its interest rates a few times over the next six months.
In Australia and for the RBA, it is an approach that is ignoring a litany of weak economic indicators.
Think about this for a moment for the Australian economic scorecard. Private sector business investment is in free-fall to be down 13 per cent in the last year and 33 per cent in three years. Underlying inflation is the lowest ever recorded and has been below the bottom of the RBA target range for over a year. Wagers growth has slipped below 2 per cent which is the weakest wages growth in many decades. Employment growth has stalled and underemployment is at a record high.
The Australian economy is in reasonable shape as 2016 draws to a close. Real GDP growth is around three per cent, inflation is 1.5 per cent while the unemployment rate is hovering near 5.75 per cent.
To be sure, it would be desirable if growth was a little stronger and unemployment lower, but given the collapse in mining investment, consumer spending being constrained by record low wages growth and the pressure of global disinflation on local producers, 2016 has been a stronger year than almost all forecasters were anticipating at the start of the year.
There are reasons to think that 2017 will also be a reasonably good year for the economy.
Commodity prices are edging up and are higher now than at the start of 2016, and, in some cases, this is by a large amount. This is leading to a lift in national income and nominal GDP growth. The Australian dollar, which has been stuck around US 75 cents for many months now, is providing a competitive boost which will further underpin economic growth. One only has to look at the surge in tourism and education exports to see how the lower Aussie dollar is helping the economy.