Ahead this week: The 2, 2, 2, 2 and 9 economy

Sun, 31 May 2015  |  

It’s a big week for economic data and events.

We are likely to see the RBA hold the cash rate at 2.0 per cent, annual GDP growth weaken to just 2 per cent, annual inflation to come in at around 2 per cent, building approvals drop 2 per cent and annual growth in house prices to jump to 9 per cent.

These indicators are not good news on the economy. 2 per cent GDP growth is poor, inflation near 2 per cent is too low and the house price imbalance remains a bigger threat to the long run well being of the Australian economy than any weakness in commodity prices or slowing in the Chinese economy.

It would be a disaster for house prices to fall away over the next couple of years as it would be if house prices keep rising by 9 per cent per annum over the next few years. It is a lose/lose situation, it seems. It remains a pity that the RBA didn’t cut interest rates more aggressively in 2012 and early 2013 when it was obvious the terms of trade were falling and the Australian dollar was overvalued. It could then have hiked in late 2013 and early 2014 to send a powerful message to house buyers that interest rates do not always go down and stay low. Obviously, recent cuts would have been delivered, but such a strategy that may have dealt with the housing problem and compensated for the terms of trade decline.

Indeed the last interest rate rise was in 2010, almost 5 years ago. Many people have seemingly forgotten about the risk of higher interest rates. The RBA, by passively sitting by and not cutting enough, not hiking and then not cutting have failed to use monetary policy as a tool for managing demand and inflation over the cycle. It is like sitting in a car and rolling down a hill in neutral - neither accelerating nor breaking as needed.

Which leads to the problems that will be evident this week. Runaway house prices, weak GDP growth and inflation at the bottom of the target range demand high, no low, no high, no low interest rates. Here is the RBA’s dilemma.

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

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Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

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What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.