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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2019-20 budget will be 'problematic': here's why

Wed, 20 Feb 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/2019-20-budget-will-problematic-heres-194957605.html 


2019-20 budget will be 'problematic': here's why

Word has it that the framing of the budget, due to be handed down by Treasurer Josh Frydenberg the day after April fools day (and around 6 weeks before the election), is more problematic than usual.

Problematic because there is some mixed news on the economy that will threaten the current forecast of a return to budget surplus in 2019-20.

Housing has gone into near free-fall, both in terms of prices and new dwelling approvals. This is bad news for GDP growth.  The unexpected severity of the housing slump is the key point that will see Treasury revise its forecasts for GDP growth, inflation and wages lower when the budget is handed down.

It will be impossible for Treasury to ignore the recent run of hard data, including the weakness in consumer spending and a generally downbeat tone in the recent economic news when it sets the economic parameters that will underpin its estimates of tax revenue and government spending and therefore whether the budget is in surplus or deficit.

This is the main driver for a cash rate CUT, and it'll happen soon

Wed, 13 Feb 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/main-driver-cash-rate-cut-itll-happen-soon-200635247.html 


This is the main driver for a cash rate CUT, and it'll happen soon

The prospect that interest rates will be lowered within the next few months is already starting to impact on the economy.

Here’s how.

Around the middle of 2018, financial markets were expecting the RBA to hike official interest rates to 1.75 or 2 per cent over the course of the next 18 months or so. If proof was needed that investors and economists can get it wrong, markets are now pricing in official interest rates to be cut towards 1 per cent over the next 18 months.

The about face has been driven by a raft of disappointing news on the economy, most notably the fall in house prices, the free-fall in new dwelling building approvals and a slump in retail spending growth.

Business confidence has also taken a hit and job advertisements have been falling for eight straight months. Ongoing low inflation and increasing signs of a slowdown in the global economy have simply added to the case for this dramatic change in market pricing.