The RBA is like a rabbit in headlights

Sat, 10 Jun 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: 


The RBA is like a rabbit in headlights


There is no other way to describe the March quarter GDP result which showed annual growth of just 1.7 per cent, which is one of the weakest results in the last 25 years.

Little wonder consumers are feeling under the pump, with real wages falling, savings being run down to fund their meager spending growth and unemployment / underemployment adding to insecurity.

The genuinely odd thing about the current economic malaise is the policy complacency that prevails. Neither the government or the Reserve Bank seem to be in the least bit concerned about the disinflationary funk being felt in Australia.

A month ago, the government delivered a budget that took away any extra spending in the economy via tax hikes on banks and a rise in the Medicare levy. Not an iota of policy stimulus was unveiled to deal with the chronic sluggishness in the economy.

To be fair, the government did – rightly – have an eye of the budget bottom line and an eventual return to surplus, but at a time of problematic economic circumstances, some fiscal stimulus is undeniably helpful.

Perhaps more worrying is the reaction of the RBA which again left interest rates unchanged this week, at one of the highest levels in the industrialised world.

The RBA has a very rosy outlook for the economy and is like a rabbit in the spot light, unable to move, because of the glow from the house price boom in Sydney and Melbourne. While unlikely, the upbeat view of the RBA may come to pass, but it is absurd to think that a cash rate of 1.0 per cent or even 0.5 per cent (from the current 1.5 per cent) would spark a lift in underlying inflation to the top end of the 2 to 3 per cent target band.

Rather a dose of meaningful monetary policy stimulus would free up cash flow for the business world as borrowing costs declined and the threshold for new investment decisions is lowered, which would inevitably spark upside risks to the otherwise dull outlook for business investment.

Alas for the rest of the economy, this east-coast housing obsession of the RBA is hurting the rest of the economy with monetary policy tighter than it need be. It was enlightening and economically frightening to see the Australian dollar movements this week, largely on the back of the RBA decision to keep rates on hold.

The Aussie dollar rose sharply, hitting 75.5 US cents as global investors took advantage of the globally high interest rates that seem likely to remain at these elevated levels for some time.

For exporters and those domestic firms competing with importers, the rising Aussie dollar is another impediment to extra sales, profits and employment.

Ahead, the fragile household sector will get a jolt to their finances from what appears set to be a massive hike of the order of 20 per cent in their power bills. Not only will these bills be confidence sapping, they mean aggregate spending elsewhere in the economy will be undermined.

If neither the government or the RBA see fit to deliver some pro-growth policies in the near term, it is likely that GDP growth will remain mired around 2 per cent, with underlying inflation and wages growth around the same pace. The unemployment rate is likely to reach 6 per cent just when the housing boom is starting to reverse. Late 2017 and 2018 could be tough times indeed for consumers specifically and the economy more generally.

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As house prices fall across Australia, should we be worried for our economy?

Tue, 13 Mar 2018

This article first appeared on the Yahoo7 Finance website at this link: 


As house prices fall across Australia, should we be worried for our economy?

Are you a home owner?

If you are in Sydney, Perth and Darwin, you are losing money at a rapid rate.

In Melbourne and Canberra, prices are topping out and there is a growing risk that prices will fall through the course of this year. If your dwelling is in Brisbane or Adelaide, you are experiencing only gentle price increases, whilst the only city of strength is Hobart, where house prices are up over 13 per cent in the past year.

The house price data, which are compiled by Corelogic, are flashing something of a warning light on the health of the housing market and therefore the overall economy. For the moment, the drop in house prices has not been sufficient to unsettle the economy, even though consumer spending has been moderate over the past year.

The importance of house prices on the health of the economy is shown in the broad trend where the cities that have the weakest housing markets tend to have the slowest growth in consumer spending and are the worst performance for employment and the unemployment rate. The cities with the strongest house prices have strong labour markets and more robust consumer spending.

Trump could cause the next global recession: here's how

Wed, 07 Mar 2018

This article first appeared on the Yahoo7 Finance website at this link: 


Trump could cause the next global recession: here's how

The Trump trade wars threaten the global economy. This is not an exaggeration or headline grabbing claim, but an economic slump based on a US inspired global trade war is a distinct and growing possibility as it would dislocate global trade flows, production chains and bottom line economic growth.

Up until a few weeks ago, there was a strong enthusiasm for the economic policies of US President Donald Trump. Tax cuts and planned infrastructure spending were seen to be good for the US and world economies. US stocks and many around the rest of the world rose strongly, to a series of record highs. At the same time, bond yields (market interest rates) surged as the market priced in interest rate hikes and inflation risks from the ‘pro-growth’ policies. It was seen to be good news.

Very few, it seems, were worried about the consequences for US government debt and the budget deficit from this cash splash, especially when the US Federal Reserve was already on a well publicised path to hiking interest rates.

About a month or two ago, a few of the more enlightened and inquisitive analysts started to focus on the fact that the annual budget deficit under Trump was poised to explode above US$1 trillion with US government set to exceed 100 per cent of annual GDP.

A debt binge fuelled by tax cuts was a threat to the economy after the temporary sugar hit.