Despite the best efforts of our new tribe of gloom and doomers, the white collar recessionistas and various commentators, a rate cut next week isn’t a certainty, even if we get a weak inflation figures in Wednesday’s for the December quarter Consumer Price Index .
Local media leapt on last week’s World Bank downgrades of its 2012 economic forecasts and will remount their tumbrils when the IMF produces its own downgraded forecasts tomorrow night (but will they point out that the IMF will join the World Bank in maintaining a high 8%-plus growth rate for China this year?). Then last week’s sluggish jobs data for December, plus anecdotal reports of job cuts at banks and other service groups and companies, has also had the D&G mob and traders baying for another cut.
There was another round from Deloitte Access Economics director Chris Richardson, producing another round of
promotional material sorry, forecasts, to be eagerly consumed by his PR agencies aka the media. For those of us who fondly recall Richardson’s repeated forecasts of how the end of the mining boom was just around the corner, it was a bit of a trip down memory lane, although there was a certain element of “no shit, Sherlock” to his prognostications. “The worst employment market in 20 years will continue in the first months of this year, and a worsening of the European credit crisis could send the jobless rate surging towards 6%.”
As we reported last week, however, the employment figures don’t exactly fit the D&G agenda. In fact, the “fall” in employment welcomed by the Hanrahans as evidence of looming disaster was mostly a result of the ABS’s seasonal adjustment process. In December, employment actually rose by more than 110,000. Full-time employment rose by over 130,000. The participation rate also rose back to 65.8%. Part-time employment indeed fell, but by less than 20,000. But in seasonally adjusted terms, it was much worse: total employment was adjusted downwards by nearly 30,000, driven by by 50,000-plus adjustment downwards in part-time employment.
This doesn’t mean the figures were good or the ABS was somehow cheating — if employers aren’t hiring as many people as normal, that has the same impact as retrenching staff. Its seasonal adjustment process uses the previous three years’ data to identify seasonal components. The ABS identified women aged 15-19, and to a lesser extent women aged 20-24, as the main group that saw a fall in employment instead of the usual December increase, which in recent years had been of the order of 21,000-33,000. This suggests the problem was primarily in retail, and we know retail is changing: the emerging trend is more spending on services, more ordering goods (domestically and internationally) online and avoiding the big retailers (which are big employers). The D&G agenda therefore risks extrapolating the retail evolution onto the rest of the non-resources economy.
It’s always important to pay close attention to the employment numbers. As economist Stephen Koukoulas pointed out, Judith Sloan and The Daily Telegraph have significantly misrepresented the December job figures, claiming they showed that 100,000 jobs had been lost during 2011. In fact the seasonally adjusted figures showed a fall of exactly 100 jobs; the original data 1800 jobs, and trend data an increase of about 25,000. We know the Telegraph’s agenda, but it’s disappointing Sloan has left such a howler uncorrected.
You’d think the D&G crowd and those who cut-and-paste Richardson’s views might take a wider look at what’s going on in the markets and in other economies in the interest of context. The US economy is doing better than expected two months ago, although the capacity of America’s political classes to produce another bout of fear and loathing on debt and spending won’t be far from the surface in this election year. And there are signs emerging in Europe of tentative steadying in sentiment and an easing in the strains in the area’s financial system.
They are also ignoring the message from financial markets (which is strange many of the D&G mob claim to believe in the messages markets send). The most important indicator is the continuing strength of the Aussie dollar, a three-month high on the weekend in offshore trading. Wall Street is up 20% from last October, and about 4% or better for January so far. The local market is up 4.5% this month, European markets have risen by the same amount, Asian markets are up more than 3.5%, with China making a solid recovery, despite widespread Western forecasts of a crash.
The prices of major industrial commodities are also up strongly this month (led by copper, the most widely watched mineral commodity, with a 22% gain) despite the continuing strength of the US dollar against the euro, which traditionally undermines commodity prices.
All this has been largely ignored by mainstream economics writers, analysts and forecasters. Some isolated columnists (such as Robin Bromby in The Australian this morning) have noted the surge in the prices of key commodities, but not the D&G crowd.
And yes, Greece and that deal with bondholders remains a critical element: media reports are talking about a “haircut” of up to 70% instead of 50% for bondholders in the new bailout package, and an interest rate lower than many banks want. But if a deal is done, it will give Greece a sliver of hope that it will be able to survive for this year and possibly into 2013. Even if Greece eventually defaults at some point, the longer it doesn’t, the better we will all be.
The next key piece of data is Wednesday’s CPI: it could come in with a reading of 0.3% to 0.4% for the quarter, which would give a headline annual rate about 3.4%, perhaps 3.2% depending on revisions. But the underlying annual rate favoured by the RBA would be about 2.4% and well inside the 2%-3% band over time. That will be hailed as the basis for a rate cut.
But that doesn’t necessarily follow. The rate cuts in November and December were precautionary (and justifiable by the downturn in inflation from mid year onwards) in the event of Europe imploding. If there’s a Greek debt deal, the risk of implosion is lessened for the time being. The European Central Bank’s 489 billion of three-year loans to more than 500 European banks have stabilised the financial system and started thawing the credit freeze. American investors last week returned to buying European bank debt and money market funds are reportedly among them. They were the first US investors to abandon the EU banks last year.
With the outlook steadying and fear levels easing, what’s the case for the RBA to further cut rates? Monetary policy is now “accommodative” for the whole economy. Rate cuts can’t and shouldn’t be aimed at specific sectors, such as weak retailing, or designed to help overconfident and profit-hungry bankers achieve their bonuses for 2011-12 by stimulating demand for loans.
No, the RBA put in place its eurozone-based measures last year. In the absence of further disasters — and they can’t be ruled out — the bank’s best bet would be to wait and see. It’s called conserving your ammunition. If things go bad in Europe, they’ll need all the ammo they’ve got. For the moment, we can still hope they won’t need it.