The RBA is like a rabbit in headlights

Sat, 10 Jun 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/rba-like-rabbit-headlights-050200564.html 

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The RBA is like a rabbit in headlights

Horrible.

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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Do we need to be worried about Australia's economic outlook?

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