RBA holds at 2.5% - the rate that stops the nation

Tue, 04 Nov 2014  |  

The RBA is surprisingly blind to economic trends, domestically, globally and in commodity markets. Well, that is, if they actually believe the material in the statement today that accompanied the decision to leave official interest rates unchanged at 2.5 per cent. It has failed to see clear trends in the data and has missed a chance to use further interest rate reductions to underpin economic growth.

Let look at a few trends and what the RBA said.

Inflation low and falling – underlying inflation back to middle of target.

Wages growth falling to record lows and public sector wage increases will drag aggregate wages growth to levels never before recorded in Australia. RBA says: "Growth in wages is expected to remain relatively modest over the period ahead".

No change in employment for six months, despite the working age age population (those aged 15 and over) rising 170,000. The unemployment rate at a decade high of 6.2 per cent. RBA says: "Although some forward indicators of employment have been firming this year, the labour market has a degree of spare capacity and it will probably be some time yet before unemployment declines consistently."

Retail sales so-so, with a rise in September a bright note after a half year run of soft activity. The number of dwelling building approvals is falling and in trend terms has fell every month in the first half of 2014 with no growth since. RBA says: nothing.

Export values are in free fall, down a staggering 10 per cent since the start of the year with the over-valued Aussie dollar and plunging commodity prices smashing export returns. Looking at commodity prices and the price is grim. Iron ore, gold, coal, oil, among others are at or near 5 year lows, a sure sign that global economic activity is unpleasantly weak, despite the better news from the US. RBA says: "the Australian dollar remains above most estimates of its fundamental value, particularly given the further declines in key commodity prices in recent months. It is offering less assistance than would normally be expected in achieving balanced growth in the economy". 

The RBA adds: "China's growth has generally been in line with policymakers' objectives, though weakening property markets there present a challenge in the near term. Commodity prices in historical terms remain high, but some of those important to Australia have declined further in recent months." Huh? Japanese GDP is at a historical higher, just that it hasn't grown for many years. It's about growth.

To be sure, the 2.5 per cent is somewhat stimulatory and house prices in Sydney are rising too rapidly but with Japan, the Eurozone, the US, Canada, the UK and others engaging in extraordinarily stimulatory monetary policy, the 2.5 per cent looks like Mont Blanc – too high. RBA says: "Monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates". 

It is not clear what it will take for the RBA to see the light – maybe a sub 2 per cent readings for inflation and wages or a 6.5 per cent unemployment rate? One thing seems certain and that is the economy is underperforming, it needs a tonic. Fiscal policy is being targetted at returning to budget surplus and is not helping growth all that much so interest rates need to be lowered to start the nation up again.

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

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   


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

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

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.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

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.