The RBA is for turning - it might take a while but we'll get there

Mon, 12 Feb 2018  |  

The following is s series of tweets I recently posted and given the feedback, I thought there were worthy of a blog post.

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The RBA is finally coming around to the fact that the economy is not strong and there is oodles of spare capacity that will not be mopped up for possibly several years.

The RBA were shattered, almost personally, with the low CPI result for Q4 and the jump in unemployment in December. Of vital importance, it has come to the view that the good employment data are not representative of labour force health - unemployment and underemployment are they key.

Wages growth and hence inflation will not pick up while the economy muddles along and the slack in the labour market remains.

Indeed, some basic modelling suggest inflation is more likely to fall below 1% than reach 3% in the next 2 years, even if GDP only marginally undershoots the RBA's very upbeat outlook.

House price are falling: This is good news, for sure, but careful what you wish for. The first few months of 2018 could spell some risks if house price falls accelerate and widen geographically.



The AUD not a major problem for exports/import competing sectors - at between 0.7500 to 0.8000 it is more a stone in the shoe; uncomfortable and slows you down when you are trying to pick up speed. Sub 0.7500 might be needed to see growth and inflation lift.

Buoyant business confidence is not being driven by top line economic growth, rather the squeeze on input costs – eg, wages. This is fine, but not as good for the jobs market if it was because business was booming. This is a vital change in dynamics for analysing the business surveys and what they are saying about the economy.

Capex / public spending are looking good for now: Risks tilting down on an 18 month time horizon especially as several infrastructure projects near completion. This is a risk to the 2019 forecasts,

The market pricing for rates reflects RBAs wonderful “Chatham House” briefing of market economists. They usually take the RBA view (don’t fight the RBA – 'its argument is quite good'). Calling the RBA out for policy failure and those meetings will dry up.

RBA needs to change market sentiment: Low wages data to be released next week may be the catalyst for a sea change. 

A low CPI in April, following a soggy GDP result in May and unemployment ticking up to 5.7% might see interest rate cut priced in by mid year.

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Rather than an unexpected pick-up in economic activity driving the revenue surge, it appears that technology, the decline in the use of cash and the greater use of cards accounts for the extra tax take.