The concern, according to Lowe, remains weak household consumption and softness in housing markets, even though, as he noted, there are “tentative signs that [house] prices are now stabilising”. Perhaps most importantly, at least for considerations of monetary policy, Lowe noted “subdued” inflation pressures, a recent rise in the unemployment rate and the need to make “further inroads into spare capacity in the economy”.
This is the crux of what the current stance of monetary policy is trying to address. These economic circumstances were broadly in place about a year ago, when the RBA should have cut interest rates to current levels, a move which would have supported activity in 2019.
It is well documented that in 2018 the RBA was starry-eyed about the economic outlook as well as using monetary policy to act as a brake on house prices and household debt. It also was of the view that steady interest rates were a sign of financial stability, even as economic conditions faltered.
These errors and misjudgments have cost tens of thousands of jobs, with the unemployment rate rising, underlying inflation hitting record lows and annual wages growth stalling at a little above 2%.
The RBA is now playing catch up.
Whether the RBA has done enough with a 1.0% cash rate to kickstart the economy to the point where wages growth and inflation pick up to more comfortable levels is not yet clear. A lot will depend on factors outside its control including tax policy and other possible pro-growth measures from the Morrison government, what happens in the global economy and, in particular, whether the recent strength in commodity prices and the terms of trade can be sustained.
Also important will be the housing cycle for both prices and new construction. As Lowe noted, there are indeed tentative signs that house prices are close to stabilising after nearly two years of decline. Very favourable affordability suggests price growth is likely over the next few years, aided by the current level of interest rates. If this turns out to be the case, consumer spending will no longer be constrained by the weight of falling wealth. Auction clearance rates in Sydney and Melbourne are back at levels consistent with moderate house price gains.
New dwelling construction remains a problem with building approvals still in sharp decline. This will see dwelling investment undermine economic growth through to the middle of 2020, but with strong population growth and the absence of any oversupply of dwellings, there is a limit, which is near, to how far dwelling construction can fall.
Lowe is correct when he says that the economy is registering solid export growth, the terms of trade are buoyant, the business investment outlook is improving and government infrastructure and other spending are strong. All of which presents some support for the economy over the remainder of 2019 into 2020.
For now the interest rate futures market is pricing in a further 25 basis point interest rate cut by the end of 2019, a move that would take official interest rates to 0.75%. Whether this is delivered by the RBA will critically depend on the impact of the stimulus from the two most recent interest rate cuts, the soon to be legislated cuts in income taxes and the impact of global conditions on domestic activity.