Annual GDP growth is just 1.8 per cent, one of the weakest growth rates recorded in the last 25 years and now one of the weakest in the industrialised world. At the same time, wages growth has never been lower, at just 1.9 per cent. The level of labour underutilization – that is the sum of the unemployment rate and the underemployment rate – is over 14 per cent, a level usually seen when the economy is near recession.
Inflation, which after all is the main target of the RBA, is in underlying terms running at 1.8 per cent, and has been below the bottom of the RBA target range for almost two years. In the current global environment of low inflation, it is difficult to see Australia’s inflation rate moving much higher over the near term and has close to zero chance of exceeding 3 per cent, the top end of the RBA target range.
At the same time, Australia’s high interest rates relative to the rest of the world are a magnet for capital inflows to the point where the Australian dollar has rocketed back to 80 US cents. If sustained, this will act to dampen export income and will make it harder still for local firms to compete with importers.
In other words, an inappropriately high Australian dollar is working to slow an already soggy economy.
It is also quite clear that housing construction is cooling. This is not good news, not just for the next year or two of GDP, but it risks leaving Australia with a housing shortage if new construction lags population growth and other demographic changes. Lower interest rates would encourage new construction.
Everyone knows that changes in interest rates impact with a long and variable lag. That is, it takes something around 3 to 18 months for a change in monetary policy to impact on the economy. As such, forecasts are always going to be part of any policy deliberation.
But when the data confirm the forecasts of a year or two ago are consistently wrong and the errors are all in the same direction, remedial action – ie a policy catch up is needed.
In the mean time, the weak economic growth leaves around 725,000 people unemployed, and around 1.1 million underemployed. Had the RBA been a little more reactive to the data and less taken with its rosy forecasts and it had cut interest rates further to boost the economy, the number of people suffering for the lack of work would be materially lower.
And worryingly, the latest noises from the RBA suggest it is still upbeat about the outlook and has no inclination, at all, to cut interest rates.
This means that growth and jobs will be lower than need be for a while to come.