Jobs and inflation point to interest rate cut

Fri, 28 Jul 2017  |  

The big data points of the past week or so have confirmed the following economic facts.

The annual increase in underlying inflation is tracking at 1.8 per cent, locking in seven quarters where the inflation rate has been outside the RBA target range, and the unemployment rate remains high, at 5.6 per cent, which will inevitably lock in low inflaiton in future,

These two issues alone would suggest the need for monetary policy easing from the RBA. If the economic checklist is expanded to include below trend GDP growth, a surging Australian dollar and respective, but not great, performance from the global economy and the rate cut would be a slam dunk. Alas, the RBA is worried about financial stability, house prices in Sydney and Melbourne and is supremely confident about the outlook for the economy into 2018.

This means the RBA is not going to cut interest rates any time soon, even though a more progressive RBA would. 

The economy is at an inflection point and which was it goes over the next six months will determine whether the next move in official interest rates is up or down. For the hike scenrio to move to centre stage, the following events must unfold. 

GDP growth needs to be confirmed on a path to 3 per cent; underlying inflation needs at least two consecutive readings at 0.7 per cent or more, wages growth needs to pick up towards 3 per cent and the unemployment rate needs to track towards 5 per cent or less.

I am not aware any forecasting making these calls, yet they are calling interest rate hikes.

Strange days indeed.


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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.