RBA decision sets the economic parameters of campaign
If the RBA cuts rates today, it will reflect how little support the government has provided the economy via the budget -- a situation that's not about to change, write Glenn Dyer and Bernard Keane.
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This afternoon, according to the overwhelming consensus of market forecasters, the Reserve Bank will cut the cash rate to a record low of 2.5%. If that eventuates, it will sum up the problematic nature of the economic underpinnings of this campaign, as the RBA has been left alone to try to steady the economy as it makes the much talked-about transition from the mining investment boom to an old-fashioned, domestic-driven growth pattern and job generation.
The post-meeting statement from RBA governor Glenn Stevens and then Friday’s third RBA Statement of Monetary Policy for the year, which will contain new forecasts for growth, but not inflation, will underline how little government will be doing to help the RBA ease the economy in the difficult period of transition. Despite Prime Minister Kevin Rudd’s productivity improvement plan, the real need is help for the economy from an easier fiscal policy in the next year to 18 months.
There’s been little such help so far — indeed, the opposite. As the RBA cut rates and cut again through 2012, Labor’s fiscal policy instead was a 3.2% real cut in spending in 2012-13, the first cut of that size since the 1980s. Much of that cut involved shifting spending backwards and forwards to meet the Gillard government’s surplus goal (that goal began life under Rudd Mark I’s last budget, in May 2010), but it was still a significant fiscal contraction.
For a time it looked like this wouldn’t have too much impact, especially after former treasurer Wayne Swan (correctly) accepted humiliation rather than persist in trying to cut spending to match declining revenues last December; housing construction began picking up this year under the stimulus of the RBA’s rate cuts. But the risk was always that we were relying too heavily on monetary policy to take us beyond the peak of the mining investment boom. With the Treasury’s downgrade of growth forecasts and upgrade of unemployment forecasts on Friday, it appears that risk has been confirmed.
Fiscal policy will be a little easier this year: Treasurer Chris Bowen, following Swan, has also elected not to further cut spending this year or next and delayed the return to surplus by yet another year (fortunately Bowen has had little time to deploy colourful phrases like “come hell or high water”). Spending this year, helped by some delayed spending from 2013-13, will increase by a full 1% of GDP, though only back to about the level of 2011-12.
But even with interest rates at record lows and a lift in government spending, the economy is still below trend — and no longer just a little below trend, but at 2.5% growth.
But we can’t expect any help from the Coalition, which remains on its debt-is bad kick — helped by its megaphones at the News Corp papers and The Australian Financial Review. Shadow treasurer Joe Hockey has explicitly rejected the argument that he favours austerity, but the Coalition rhetoric continues to be about hacking into spending the moment it’s in government.
“The grown-up of the Coalition’s economic team, Hockey … has suggested rate cuts are a sign the economy has been mismanaged by Labor, while at the same time arguing Labor is spending too much.”
For the austeristas in the media and the opposition, this isn’t merely a matter of missing out on a bit of growth and a rise in unemployment (and, hey, some longer job queues never really hurt anyone, surely? They allowed business to hold down wages and undermine bolshie unions). If the economy stalls next year, as the RBA fears it might, and a Coalition government is hacking and slashing, then the return to surplus will be in the early years of the 2020s, not 2016-17. Higher unemployment, lower tax revenues and flat growth will all conspire to increase the deficit and lift debt, both in real terms and — as we’ve constantly seen in Greece — compared with GDP.
By the way, the grown-up of the Coalition’s economic team, Hockey, who admittedly faces the unenviable political task of arguing interest cuts under Labor are a bad thing (“interest rates will always be lower under a Coalition government”, etc etc), has suggested rate cuts are a sign the economy has been mismanaged by Labor, while at the same time arguing Labor is spending too much. Maybe, Joe — but both can’t be right, unless Labor has found some economically miraculous way of spending money so that it doesn’t end up in the economy.
“Interest rates are likely to be lower in such a world than they were in a world in which households were extending their finances. This is a global phenomenon, but it holds in Australia too. We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand. The recent inflation data do not appear to have shifted that assessment.”
While commentators took that as a signal that rates could very well be cut today (and could the bank cut by 0.50%?), what Stevens was saying is that the central bank sees the pace of growth being low (despite possible higher inflation from higher import costs from the weaker dollar) for some time to come. That view is despite the “substantial” monetary policy stimulus, as the bank’s July minutes put it, already administered to the economy by rate cuts since late 2011.
Stevens laid out what the economy after the boom will look like:
“The fact that consumption is likely to provide only a modest impetus to any acceleration in domestic demand suggests that other areas will be important… at least some of the conditions are in place for stronger trends in dwelling investment and, in time, non-resources business capital expenditure. And exports of resources will continue to pick up strongly. But successful ‘rotation’ of demand will probably also involve more net foreign demand for other Australian output of various kinds.”
In other words, exporters will have to boost activity and shipments, productivity will have to go on improving and housing construction and demand will have to pick up — not the prices of existing home sales. The Rudd productivity plan attempts to address this scenario, but is undermined by yesterday’s $200 million of handouts to the car industry, money that would have been better being applied in trying to kickstart a non-mining investment boom.
And while Rupert’s rags are calling for Labor to be thrown out, in the real “market” of opinion — the sharemarket — there are no such concerns. Since Rudd returned to the prime ministership on June 26, the ASX200 has risen by around 460 points, or 9.8%. Not exactly a vote of no-confidence — in fact, the market jumped 1.1% on Friday when the mini-budget and the tax rises and spending cuts were announced.
The earnings outlook in Australia is weak at the moment, as we will see with the first significant bout of June 30 (full-year and half-year reports) this week. But investors aren’t worried about the outlook for low, slow or no growth, not when there’s money to be made from low interest rates and the US Fed’s huge spending, even if they know and have accepted that that will start ending sooner than later.