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Dynamic Syndications

An RBA rate cut is not about housing – it’s about exports and investment

Tue, 06 Nov 2018  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/heres-reserve-bank-needs-cut-rates-000642869.html 

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An RBA rate cut is not about housing – it’s about exports and investment

Many people misunderstand my concern about falling house prices and the coincident call for the Reserve Bank to cut official interest rates.

Any interest rate cut that the RBA may yet deliver should not, and certainly will not, be aimed directly at supporting house prices. On the contrary – future interest rate cuts should be directed at supporting the economy more generally at a time when the house price falls threaten to erode household wealth, consumer spending and the economy more generally.

The house price declines in the current downturn are much what I was forecasting a year ago. The issues surrounding the price falls are being compounded by the recent acceleration of the decline, the historic collapse in housing auction clearance rates, the escalation of the bank credit freeze and the on-going problems with low wages and inflation that are all creating an environment that will hit the economy into 2019.

While a recession in Australia is still unlikely, very unlikely in fact, there is a growing risk the unfolding mix of events will hit the economy hard.

The destruction in household wealth from the falls in house prices alone is now about $300 billion. Add to this another $100 billion of wealth destruction from the recent fall in the stock market, and a climate of severe weakness in consumer spending is front and centre in the outlook for most credible forecasters.

This is why the RBA would be wise to cut interest rates.

To reiterate – the wisdom in cutting interest rates is not to reflate house prices. On the contrary, macro-prudential rules and the tight credit conditions for mortgages should remain in place if interest rates are lowered. Lower interest rates matter because they would help guard against the fall out from the unfolding household wealth destruction which would see annual GDP growth slowing to around 2 per cent, it would see the unemployment rate get back up towards 6 per cent and inflation would fall from already near record low levels.

Most analysis on interest rates makes the mistake of focusing on the housing market if a rate cut is delivered.

Ignored is the fact that the business sector has over $940 billion of bank debt and another half a trillion or so in corporate debt. Lower interest rates would free up cash flow on this business debt by lowering debt service costs. This would not only help business to invest and hire more, it would underpin new business investment as the interest rate threshold for expansion is lowered.

What’s more, interest rate cuts would likely see the Australian dollar fall, especially when the US is in a clear cycle of interest rate increases. A lower Aussie dollar would give the export sector an extra boost, adding to economic growth and national incomes and would provide an offset to the looming weakness in household spending. It would also help local businesses competing with aggressive low cost importers as the price of imported items rose.

The housing market is important in itself but more importantly, in the way it risks dragging the rest of the economy down with it.

It is this latter point where policy should be directed for the sake of economic growth and stability.

With inflation locked in at a remarkably low rate, the most effective policy change would be to cut interest rates to shore up the business sector in the risky time.

More in this category: « The absurd issue of electricity prices How Labor’s plans to revamp negative gearing could put a floor on house prices and lower rents »
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The RBA has the tools to fix the economy, but is reluctant to use them

Thu, 05 Dec 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/rba-tools-reluctant-042742904.html

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The RBA has the tools to fix the economy, but is reluctant to use them

The Reserve Bank of Australia has made a range of serious policy errors over the past few years, and the Australian economy is weaker because of those mistakes and misjudgments.

Not only is the RBA on track to miss its inflation target for six years, and perhaps longer, the persistently high unemployment rate in concert with record low wages growth is the result of the RBA’s tardiness in cutting interest rates because of its textbook obsession with house prices and household debt.

It is a mistake that has cost the economy tens of billions of dollars in lost output; employment is many thousands of people below what could have been achieved; and all the while wages growth hovers near record lows undermining the wellbeing of the workforce. What’s worse, the RBA seems to have thrown in the towel on trying to meet its inflation target, even though that target was confirmed a month ago in the recent update of the Conduct of Monetary Policy between the RBA and Treasurer.

In this context, Deputy Governor of the RBA, Guy Debelle, gave a fascinating speech earlier this week on the topic of employment and wages.

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Household wealth is booming: What this means

Mon, 25 Nov 2019

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/household-wealth-booming-200022930.html 

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Household wealth is booming: What this means

$500,000,000,000.

In other words, half a trillion dollars.

That is approximately the amount Australian household wealth has increased since the start of July 2019, with house prices surging, the Australian stock market moving higher, and savings increasing.

The bulk of the gains have occurred via rising house prices, which according to CoreLogic, are up over 5 per cent in less than five months. This move in house prices has added around $360 billion to the value of housing and is driving the rebound in wealth. At the same time, the level of the ASX has risen by around 2 per cent with a further $40 billion being paid out in dividends. This allows for the recent pull back on prices as new banking scandals are exposed.

In these conditions of rising wealth, the household sector is getting a serious financial reprieve, despite the ongoing weakness in wages and the still very high level of unemployment and underemployment which afflicts almost 14 per cent of the workforce.

The good news is that this wealth creation is likely to spark a rise in household spending growth once the gains are widely acknowledged in the community and then feed into consumer sentiment. This is most likely to show up in the first half of 2020, after the usual lags work their way through the economy. History shows that when we consumers experience growth in our wealth, we are more inclined to lift our spending.

Earlier this year, RBA researchers Diego May, Gabriela Nodari and Daniel Rees found that:

“When wealth increases, Australian households consume more. Spending on durable goods, like motor vehicles, and discretionary goods, such as recreation, appears to be most responsive to changes in household wealth”.

We saw this, in the reverse, in the period from the middle of 2017 to the middle of 2019 when Australia-wide house prices fell by 10 per cent, crunching wealth levels. It was no surprise that during this period, household spending growth slumped. The retail sales component fell to its weakest since the early 1990s recession. Consumer spending and confidence was not helped by the coincident weakness in wages growth and the policy mistake of the RBA which refused to cut official interest rates, even though the economy was mired in a low inflation, low growth and falling wealth climate.

Thankfully, common sense has since prevailed at the RBA and it has cut interest rates three times since June.

Demand for housing has also lifted with shrewd first home buyers taking advantage of favourable affordability and investors also stepping back in after the May election saw the return of the Coalition government and the demise of Labor’s proposal to reform negative gearing tax laws. The current wealth surge unfolding now is occurring at a time when there is also a sharp decline in the debt-servicing burden as interest rates fall. This has the dual effect of freeing up cash flows for some consumers and allows other to accelerate their debt repayment.

For the moment, the labour market remains weak and wages are still stuck in the mud. These will constrain any near term lift in household spending, but the wealth lift will be vital for sparking a pick-up in consumption, probably in the new year when the effect is more widely observed and entrenched.

It adds to the scenario where 2020 is looking like a better year for the economy with bottom line GDP growth set to hit 3 per cent in the second half of the year.  If the wealth effects build further over that time and business investment and infrastructure spending continues to lift, the economy in 2020 just might register its strongest growth rate in a decade.

 

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