The weak economy is turning higher

Mon, 15 Jul 2019  |  

This article first appeared on the Yahoo Finance web site at this link: 


The weak economy is turning higher

In the space of a couple of months, the rhetoric on the economy has gone from strong to weak.

Curiously, both assessments are wrong.

The economy was actually weak during the first half of 2019 and, if the leading indicators are correct, late 2019 and 2020 should see a decent pick up in economic activity.

It is not clear what has caused this error of judgment and the about face from so many commentators and economists, including importantly the Reserve Bank. A level-headed, unbiased look at economic data confirms that in late 2018 and the first half of 2019, the economy was in trouble. There were three straight quarters of falling GDP per capita, house prices were diving at an alarming rate, there was a rise in unemployment, wages growth remained tepid and low inflation persisted.

These are not the dynamics of a “strong” economy.

Only now, in the rear view mirror look at the economy, are these poor indicators gaining favour, leading to generalised economic gloom.

There’s an old saying, it’s always darkest before the dawn. Which in economic terms means there is a tendency for the herd to be very pessimistic, dark if you like, just before the sun starts to shine. And to be frank, the last month or so has seen some better news on the economy which is largely being ignored now, like the bad economic news was earlier in the year.

The economy is poised to enjoy some sunshine.

Let’s look back at how this misreading of the economy has evolved.

The odd change in the commentary, including from the RBA, appears to have been heavily influenced by the timing of the election on 18 May. Before then, the “strong economy” rhetoric dominated discussions. Now, post-election, the commentators and policy makers are playing catch up.

The Reserve Bank has changed its tune to the extreme point where it has cut interest rates twice in the six weeks after the election and Governor Lowe is screeching at the government in an unedifying campaign to do something to stimulate the economy. A little self reflection would show that it was the RBA’s own misjudgement prior to the election and its failure to cut interest rates a year or so ago that has compounded the current downturn.

While it is still early to say the economy has turned the corner and growth is poised to accelerate significantly into 2020, the run of recent news has been encouraging.

The housing sector, which was a drag on household wealth and spending, has seen a lift in auction clearance rates and the Corelogic measure of house prices is showing prices stabilising after the sharp declines from the 2017 peak. With housing affordability at the best levels in several decades and significant pent up demand from investors and first homebuyers alike, it is easy to forecast a pick up in house prices in coming months and certainly into 2020.

There is more solid news from consumer sentiment and business conditions, which are a little higher now than in the earlier part of 2019. These are pre-conditions for more favourable economic conditions. At the same time, exports are booming, with monthly trade surpluses hitting record after record, buoyed by strong commodity prices and strong global demand.

The ABS measure of expected business investment in 2019-20 is strong. The business sector is poised to lift its capital expenditure by close to 10 per cent after many years of decline. Add to this the yet-to-be-seen effects of the interest rate cuts from the RBA, the relaxation of credit conditions on the banks, the income tax cuts which have passed the Parliament and still favourable tailwinds from the global economy and it would be no surprise to see the domestic economy pick up before year end and for the RBA to have ended its monetary policy easing cycle.

Like many fashion trends, there can be a herd mentality when it comes to economics. It goes something like, ‘follow the RBA, follow the Treasurer, don’t think independently’.

This is a mistake.

For now, the economy is negotiating the low point in the current cycle and there are growing reasons to be optimistic that by year end, the gloom will have passed and the economy will be on track to return to what will be truly strong growth.

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“Bitterly disappointing”: We are seeing a once in a generation policy failure

Thu, 12 Sep 2019

This article first appeared on the Yahoo Finance website at this link: 


“Bitterly disappointing”: We are seeing a once in a generation policy failure

Imagine having the power to promote economic growth, lower the unemployment rate and set in train the conditions to boost real wages growth and inflation?

It would be immensely satisfying to change policies to improve the living standards and quality of life for every day, hard-working Australians and their families.

Wouldn’t it?

Next imagine a harsh reality where economic growth is weak and slowing, the unemployment rate is rising and wages growth and inflation well below a satisfactory level, and you choose not to wield the power reverse these uncomfortable circumstances?

Doing nothing, unwilling to pump some much needed cash into the economy because of a political dogma wedded to a notion that budget surpluses are good and that holding interest rates unnecessarily high so you might dampen demand for houses – which is seen as a problem - and household debt overwhelms your power to make things better.

The RBA admits it stuffed things up – sort of

Mon, 22 Jul 2019

This article first appeared on the Yahoo website at this link:


The RBA admits it stuffed things up – sort of

The Reserve Bank of Australia needs to be congratulated for publishing research which implicitly confirms that it made a mistake when setting monetary policy in the period mid-2017 to early 2019.

Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.

The costs to the economy includes lower GDP growth and higher unemployment, that lasts for at least for several years.

A few terms first.

According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.

In the context of the period since 2017 and despite the RBA consistently undershooting its inflation target and with labour underutilisation significantly above the level consistent with full employment, the RBA steadfastly refused to ease monetary policy (cut official interest rates) because it considered higher interest rate settings were appropriate to “lean against” house price growth and elevated levels of household debt.