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 RBA admits it stuffed things up – sort of

Mon, 22 Jul 2019

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/did-the-rb-as-monetary-policy-put-our-economy-at-risk-033940907.html


The RBA admits it stuffed things up – sort of

The Reserve Bank of Australia needs to be congratulated for publishing research which implicitly confirms that it made a mistake when setting monetary policy in the period mid-2017 to early 2019.

Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.

The costs to the economy includes lower GDP growth and higher unemployment, that lasts for at least for several years.

A few terms first.

According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.

In the context of the period since 2017 and despite the RBA consistently undershooting its inflation target and with labour underutilisation significantly above the level consistent with full employment, the RBA steadfastly refused to ease monetary policy (cut official interest rates) because it considered higher interest rate settings were appropriate to “lean against” house price growth and elevated levels of household debt.

The weak economy is turning higher

Mon, 15 Jul 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/just-how-weak-australia-strong-economy-213520159.html 


The weak economy is turning higher

In the space of a couple of months, the rhetoric on the economy has gone from strong to weak.

Curiously, both assessments are wrong.

The economy was actually weak during the first half of 2019 and, if the leading indicators are correct, late 2019 and 2020 should see a decent pick up in economic activity.

It is not clear what has caused this error of judgment and the about face from so many commentators and economists, including importantly the Reserve Bank. A level-headed, unbiased look at economic data confirms that in late 2018 and the first half of 2019, the economy was in trouble. There were three straight quarters of falling GDP per capita, house prices were diving at an alarming rate, there was a rise in unemployment, wages growth remained tepid and low inflation persisted.

These are not the dynamics of a “strong” economy.

Only now, in the rear view mirror look at the economy, are these poor indicators gaining favour, leading to generalised economic gloom.