For all those Crikeyers who don’t quite appreciate the problems confronting the Australian economy over the next year, Rory Robertson, an interest rate strategist at Macquarie Bank, has some thoughts worth considering. (To read his views, follow the link at the bottom of this story.)
Robertson has been consistently ahead of the curve highlighting the threat to global growth from the developing credit crunch, since the crisis started in August 2007. He was quick to see the looming dangers to growth, to stability and to the health of economies generally from the snowballing effects of the crisis and has been arguing for a while now that inflation isn’t the problem, despite the best attempts of the Liberal Party to raise the red herring).
Yes, the September quarter’s CPI next Wednesday will be high. The Reserve Bank has already warned us that it will be 5% in the year to September or higher, but it will fall once the impact of the slowdown bites. If we have a recession next year, then inflation could vanish as quickly as it came and we will hear lots of pleading to end the deflationary spiral.
It’s something San Francisco Fed President, Janet Yellen warned in a major speech late Tuesday.
Commodity prices, including the price of oil, have plunged. And I expect this development, along with a further increase in slack in labor and product markets, to push inflation down to, and possibly even below, rates that I consider consistent with price stability.
In other words, there is a danger of inflation: Japan through the 1990s and into this decade shows us the terrible damage deflation can do once it becomes endemic.
Inflation is a silly focus at the moment because it is not the central concern. The possibility of recession and a surge in unemployment is the central policy problems and how to soften the slide. Worrying excessively about inflation is why Europe is slumping into a hard landing, driven by the policy purity of the European Central Bank.
It’s also why the UK economy’s landing will be harder than necessary. If it hadn’t been the terrible loss of confidence in the financial system of the past month, the latest UK inflation rate of an annual 5.2% (out overnight) would have stopped the Bank of England from cutting interest rates last week by 0.50%. The ECB wouldn’t have cut at all.
And does anyone really think that the biggest bunch of inflation hawks in this country. The policy mandarins at the RBA, would have produced the 1% cut last week if they were concerned about inflation?
Malcolm Turnbull and the others professing to be concerned about inflation, have only grabbed that point to bash the Government and score some cheap political points.
The RBA warned that inflation would fall much faster if there was an earlier contraction than expected in demand and output. There are emerging signs in the US and European economies that demand is falling faster than forecast: so be warned.
Here in Australia we have launched a modest stimulatory package. The US handed out a tax rebate for individuals and corporates that was around $US150-$US160 billion (around $US110-$US120 billion for individuals. It lasted two and a half months at most and has disappeared: US retail sales fell by a nasty 1.3% in September after consumer credit had its biggest dollar fall in August since the Fed started collecting the figures in 1943.
We have at least targeted consumers who will spend (the US rebate went to all taxpayers) and is also aimed at boosting the home building market (which is now at levels last seen in the last recession, so its not booming).
As Rory Robertson argues below, does anyone really want to see house prices in this country fall. After all, what is the cause of the problems around the world?
It’s the continuing plunge in house prices in the US, with prices in Ireland, Spain, France, Denmark and the UK falling as well and dragging their economies into a widening black hole.
Rory Robertson starts by looking at the real threat to the Australian economy; it’s not consumer spending, its falling business investment. That’s why its right to boost spending at retailers like Harvey Norman.
Not to many critics of the package and claims that people will ‘blow it’ on plasma TVs and the like have done much though. If Harvey Norman has too many more months of falling sales, he and his franchisees will respond by cutting staff and boosting the ranks of the unemployed. If this happens, other employers will follow.
Do those who are worried about stimulating by spending and blowing the surplus really want to see unemployment growing? That’s a not too clever way of blowing the surplus very quickly and making sure of deficits for a couple of years to come.
Follow the link below to read Rory Robertson’s thoughts.
Rory Robertson writes:
Business investment is Australia’s “weakest link”
Prospects for business investment have deteriorated sharply across the globe in recent months, as equity prices have imploded, credit conditions have tightened sharply and commodity prices have slumped. Keynes’s famous “animal spirits” have been crushed, pretty well everywhere.
This is a big deal for Australia, because business fixed investment (BFI) is at a multi-decade record 16% of GDP, after having trended ever upwards since the end of the early 1990s recession. In the 2000s, the uptrend in BFI has been driven by spending on buildings and structures, a chunk of it mining-related (see top left of p.6 of 8 here).
With animal spirits, spending power and commodity prices having turned down as the global credit crunch intensified, BFI will be the weakest link in Australian GDP growth in coming years. Indeed, if the Australian economy goes into recession, BFI will be the main driver, as almost always.
Household spending will be relatively strong, particularly now that monetary and fiscal policy are providing a large boost to household cash flows, via lower mortgage rates and extra transfers to families, pensioners and first-home buyers (see below).
Four upbeat factors that give Australia a fighting chance in global downturn
As regular readers are aware, I’ve been a bit of a “doom and gloomer” all year. In a NZ conference call last week, I was asked to say something positive, to highlight any recent positive developments. I highlighted four factors that give the Australian economy a fighting chance in a global recession:
- (1) The RBA’s effective policy framework, and plenty of monetary ammunition. The RBA has cut its cash rate by 125bp in the past six weeks, and the standard-variable mortgage rate has fallen by 105bp. The Fed, the ECB and the BOE can only dream of that sort of powerful pass-through. Moreover, the cash rate still is a relatively high 6%, so there’s plenty of room for lower rates as required. I’m guessing the RBA will cut to a “neutral” 5% by Christmas, dragging mortgage and business rates significantly lower (see more on RBA below).
- (2) The weak A$ now is Australia’s new best friend, given the substantial recent drops in global commodity prices. The A$’s 20-30% decline from recent highs – to the extent that it is sustained – is a huge free kick for Australian exporters and import-competers. Some of our tradeable sectors suddenly are back in business; yes, global demand is weakening fast but at least our tourism, agricultural, manufacturing, education and other tradeable sectors will sell more with the A$ near 70 US cents than near 90 US cents (or with the TWI in the 50s rather than in the 70s).
- (3) Canberra’s pristine balance sheet (see p. 8 of 8) means there is plenty of room for a variety of helpful counter-cyclical efforts, including cash transfers, tax cuts, new spending and loan guarantees. Both Canberra and the States have scope further expansion of their infrastructure programmes.
- Indeed, Canberra on Tuesday announced a pre-Christmas stimulus package worth perhaps 1% of GDP, featuring cash top-ups for pensioners, low and middle-income families and first home-buyers.
- Importantly, with a no-net-debt starting point and Australia’s lenders well regulated and still-very profitable, Canberra’s guarantee of financial system deposits and selected (new and existing) debt securities is absolutely credible.
- (4) Australia’s housing sector is widely seen as having the problem of “under building” rather than “over-building, as in the US. In Australia, rapid population growth – driven by immigration of 100-200k every year for the past decade – has collided with a flat two-decade trend in new home starts of only 150k per annum. Canberra has overseen the biggest immigration programme in Australia’s history, without initiating the construction of extra homes. “Land release” and “planning” for home-building generally are overseen by State and local governments. The dismal lack of co-ordination between Canberra and the States on immigration and housing long has been seen as a problem, putting upward pressure on home prices and rents, and reducing “housing affordability”. Now, Australia’s slow-moving housing-supply response suddenly is a good thing, limiting the size of any future home-price falls (see p. 4).
Immigration and home prices
As you know, falling home prices are a major problem in the US, the UK and parts of Europe. The damage done by falling home prices to banks’ balance sheets in these economies – and growing damage to consumer spending – obviously needs to be avoided in Australia.
According, while largely unstated, maintaining Australian home prices near current levels now is a major policy priority for the RBA and Canberra. Aggressive rate cuts obviously help, so too Tuesday’s prodding into action of up to 150k first-home buyers.
In this context, recent reports of growing pressure to reduce our immigration intake are somewhat disturbing. Recall that, during the early-1990s recession, net immigration collapsed from 170k in 1989 to just 30k in 2003 (lowest four-quarters-ended figure), reinforcing the Australian economy’s tendency to stall. From a macroeconomic perspective, cutbacks of that order this time around should be avoided like the plague (see here and here)
RBA policy, lower interest rates, and limiting falls in home prices
Those forecasting big falls in Australian home prices would do well to notice the recent dramatic drop in mortgage rates, with more to come. The correspondingly sharp drops in interest payments relative to household income render much less relevant the elevated debt/income ratios parroted by some. Comparing stocks with flows typically tells us little worth knowing; comparing interest payments with income (flow/flow) and debt with assets (stock/stock) provides more meaningful information.
With the global economic and financial backdrop having turned so nasty, aggressive RBA easing was/is the most obvious policy response available to support ongoing economic growth. And in six short weeks, the RBA has demonstrated that its interest-rate tools are far more powerful than those available to the Fed, the BOE and most if not all other central banks. Despite much media focus, elevated inter-bank lending rates haven’t stopped big drops in mortgage rates in Australia. To recap, the story so far:
- the RBA has cut its cash rate by 125bp in two steps (25bp followed by 100bp), with more to come;
- the three-month bank-bill rate (BBSW, a key guide to a chunk of bank-funding costs) has dropped by about 1-1/3pp over the past month, to 6.1%; and
- headline mortgage rates have fallen by 105bp, to about 8-1/2%. Furthermore, three-year fixed mortgage rates have dropped by more than 1pp and now are widely available near 7%. Other important lending rates also are coming down, though not as quickly.
… Critically, recent 1pp-plus drops in cash, BBSW and mortgage rates are gold for Australian home-buyers, providing major cash flow support to the household sector and home prices, something the Fed can only dream about. That is, despite the funds rate being cut from 5.25% to 1.5%, the rate on (predominant) US 30-year fixed-rate mortgages has dropped by only around 50bp, to 6% or so, when credit is available.