The remarkably simple case for an RBA rate cut

Mon, 18 Jun 2018  |  

This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/rba-rate-cut-2018-6

-------------------------------------------------------

The remarkably simple case for an RBA rate cut

The performance of the Australian economy is a bit like my old report cards at school: “Doing reasonably well, but could do better”.

Unlike my approach to school work, which only impacted me, the current policy complacency is seeing unemployment rise, wages growth remain in the doldrums and our $1.8 trillion economy underperform. In the latest test of economic growth, the 3.1 per cent annual GDP growth rate for the March quarter was reasonably good.

It was close the long run trend and a welcome result given the performance of the economy in recent years.

Alas, it is probable that this 3.1 per cent growth rate will turn out to be a “one-off” spike, with some pull-back in the June quarter highly likely from a lower contribution to GDP from net exports, inventories and government demand. When the June quarter national accounts are released in early September, annual GDP growth is likely to slip back to around 2.7 per cent.

The 3.1 per cent growth also needs context. It followed a very ordinary growth rate of 2.4 per cent in the prior quarter, and in the last 5 years, GDP growth has averaged a mediocre 2.4 per cent.

Think of a football team in the bottom half of the competition that has a one off win again the league leaders, and that sums up the GDP result.

Context is important.

It remains a mystery why there has been a near universal lowering in expectations on what makes the Australian economy strong.

A few years ago, most pragmatic economists would judge a ‘strong’ economy to be one that is delivering a tighter labour market, in particular lower rates of unemployment and underemployment, a pick up in wages growth, higher rates of capacity utilisation and inflation bouncing around 2.5 per cent, the middle of the RBA target.

The opposite is happening in Australia right now. Around much of the industrialised world, unemployment rates of 4.5 per cent and lower are the norm.

In the US, the unemployment rate is 3.8 per cent; in the UK, it is 4.2 per cent, Germany 3.4 per cent, Japan 2.5 per cent, New Zealand 4.4 per cent.
Australia’s unemployment rate, at 5.6 per cent, is ugly in comparison, particularly given underemployment is simultaneously close to a record high 8.4 per cent. And unlike these countries where unemployment is falling, over the past six months, the unemployment rate in Australia has been increasing.

The questions about lifting growth and reducing the unemployment rate are not all that complex, but they are shunned and avoided because of a misguided economic theory linked to perceptions of financial instability and responses to deal with a rise in asset prices.

Easier economic policy stimulates economic growth, lowers unemployment and underpins higher wages.
It is simple. Remarkably simple.

With fiscal policy at least partly constrained by the objective of returning to budget balance and then surplus, the other arm of policy open to kick start growth is monetary policy.

Interest rate cuts would have multiple effects. It would free up cash flow for the business sector and households with debt, cash flow that can be allocated to investment and spending.

Lower interest rates are also likely to lower the threshold at which investments are viable and as a result would underpin stronger business investment.
It is also likely that lower interest rates would mean, at the margin, a lower level for the Australian dollar which would support exports and domestic import competing firms.

It seems a no brainer for anyone interested to lowering unemployment and boosting wages.

“Housing” I hear you shout. Wouldn’t lower interest rates spark a resurgence in the house price boom?

The short and categorical answer is no.

This is because any move to lower interest rates could be and should be accompanied by further regulatory restrictions on mortgage lending – perhaps an extension of existing rules on loans.

Ending negative gearing and building more dwellings would also work to dampen house prices. And it is interesting to note that in some parts of Australia – Perth and Darwin in particular – house prices have slumped in recent years despite lower interest rates.
There is much, much more to house prices than just interest rates.

If the RBA was to cut interest rates to 1.0 per cent or less over the next few months, the risk that inflation would exceed its target remain remote. Nor would it fuel a rebound in house prices, if the other regulates kept a firm hand on lending rules.

It would, importantly, help to lift economic growth, lower unemployment and help kick start a much needed lift in wages.

And guess what? If I am wrong and it did unexpectedly underpin an surge in inflation and lead to an overheated economy, the RBA could remove the monetary policy stimulus and hike rates.

Monetary policy is a lever that can be pushed and pulled to fine tune part of the economy. It should be used more often.

comments powered by Disqus

THE LATEST FROM THE KOUK

Will falling house prices trigger the next Aussie recession?

Tue, 17 Jul 2018

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/will-falling-house-prices-trigger-next-aussie-recession-000039851.html

 --------------------------------------------------

 Will falling house prices trigger the next Aussie recession?

House prices are falling, auction clearance rates continue to drop and there is a such sharp lift in the number of properties for sale that, for the moment, no one is willing to buy at the given asking price.

Potential house buyers who have held off taking the plunge in the hope of falling prices seem to be staying away, perhaps hoping for further price falls. But also influential factors forcing buyers away is the extra difficulty getting loans approved as banks tighten credit standards, then there are concerns about job security and associated awareness of probable cash flow difficulties given the weakness in wages growth. It is remarkably obvious that house prices will continue to fall and this poses a range of risks to the economy.

Research from a range of analysts, including at the Reserve Bank of Australia, show a direct link between changes in housing wealth and consumer spending. This means that when wealth is increasing on the back of rising house prices, consumer spending is stronger.

This was evident in Sydney and Melbourne, in particular, when house prices in those two cities were booming in the two or three years up to the middle to latter part of 2017. Retail spending was also strong. Looking at the downside, in Perth where house prices have fallen by more than 10 per cent since early 2015, consumer spending has been particularly weak.

Punters point to by-election troubles for Labor

Mon, 16 Jul 2018

 

If the flow of punter’s money is any guide, Labor are in for a very rough time on Sublime-Saturday on 28 July when there are five by-elections around Australia.

In the three seats where the results are not a forgone conclusion, the flow of money on Liberal candidates over the last few days has been very strong.

The Liberal Party are now favourites to win Braddon and Longman and in Mayo, Liberal candidate Georgina Downer has firmed from $4.20 into $2.75.

If the punters are right, Sublime-Saturday would see Labor lose Braddon and Longman and could see Liberal’s sneak back in Mayo.

If so, it would be odds on that Prime Minister Turnbull would go to the polls as soon as possible, not only to take advantage of the by-election fallout, but, from a different angle, go before the housing market and the economy really hit the wall, probably in late 2018 or 2019.

BRADDON

Liberals $1.70 (was $2.25)
Labor $2.05 (was $1.65)

MAYO

Liberals $2.75 (was $4.20)
Centre Alliance $1.35 (was $1.15)

LONGMAN

Liberals $1.50 (was $2.00)
Labor $2.50 (was $1.85)