In the first few weeks of 2015, the data flow in Australia has been a little more positive, with a nice lift in employment, a small fall in the unemployment rate, a surge in new dwelling approvals and an uptick in the ANZ measure of job ads.
At the same time, retail sales were softer, commodity prices remain in the doldrums, house price growth continues to slow and, perhaps most importantly, the world economy has deteriorated and interest rates around the world have fallen to levels reflecting another year (or even two) of funk. Of some concern, the Australian dollar has stopped falling and the value of exports remained weak.
There have been no new signals from the RBA on its thoughts about monetary policy, although more market economists are rapidly moving to forecast interest rate cuts, possibly in each of the next couple of months.
It looks like inflation is set to fall below the bottom of the RBA target, even for underlying inflation, and the unemployment rate is still vulnerable to a further half year of below trend economic growth.
The RBA needs to cut interest rates to improve cash flows and hurdles for new investment and any of its concerns about easier policy unleashing some inflation pressures are absurd. I still think the RBA will be cutting interest rates to 1.5 per cent during 2015 as it deals with very low inflation, stubbornly high unemployment, falling national incomes and ongoing below trend real GDP growth. This is where the increasingly crowded forecasts of the Aussie dollar at US$0.75 seems a done deal.