Let’s score it: one-nil to Jessica “the Guv” Irvine, News Ltd’s national economics editor over Adam Creighton, “economics correspondent” at The Australian, after their stoush on The Drum on Monday night, where Irvine had argued why there would be a rate cut, while Creighton said there was no need for one, and urged cuts in government spending and programs. As a most condign punishment, Creighton got to write the page one story on the rate cut in The Oz, under the headline “Rate cut signals end of boom”. And Irvine got the bragging rights in the tabloids.
In Glenn Stevens’ post-meeting statement, he made clear that the RBA’s thinking was different to hairshirt types such as Creighton, who think the only cuts should be to government spending, and the doomsters who think the economy is already in need of stimulus. The key part of the statement from Stevens was:
“Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”
So for RBA watchers and others, the ground rules for discussing the economy have been changed by the RBA. The short term, out to six months and perhaps as much a year, are to be ignored. The RBA, with inflation under control and able to consider options for addressing different growth scenarios with a free hand, is now looking to late next year and into 2014 because it sees a very real chance that the economy will slow sharply as the investment boom slows and the impact of the 10% fall in or terms of trade filter down through the various sectors.
The RBA isn’t concerned about the current state of the economy. Its broad message is that we’re travelling a little below trend. “Consumption growth was quite firm in the first half of 2012,” said Stevens, “though some of that strength was temporary. Investment in dwellings has remained subdued, though there have been some tentative signs of improvement … Labour market data have shown moderate employment growth.”
Its focus instead is well into the future. Many commentators got that, but one of the first was Michael Pascoe with this effort late yesterday, under the headline: “Glenn Stevens is preparing for 2014” (bearing in mind Stevens may or may not be around in 2014: his current term is up in about a year).
Economic policy is now aimed at transitioning the economy from seeing growth being driven by the abnormally strong investment and spending boom in the resources sector, with some reasonable but subnormal strength in domestic demand, to the more usual one where growth predominantly comes from the domestic economy, with a little bit added from the trade account and investment.
Despite the recent shift in economic fashion back to monetary policy (even by Wayne Swan), the fastest way to achieve this stimulus is by fiscal policy, given how many of us don’t bother to adjust our mortgage repayments when variable mortgage rates fall. But seeing that’s off the table with Labor’s commitment to surplus and its long lead-time for new social investment such as Gonski and the NDIS, the RBA has to aim monetary policy at one or two big sectors that will respond to an interest rate cut. That’s pretty much housing and construction.
Spending in both sectors is currently low by historical standards, subdued by the resources boom. The RBA will be hoping to get these sectors growing again through 2013 and 2014 as the mining investment boom fades; it has been forced to move earlier than it would have wanted to to move to start stimulating activity in housing and commercial construction; normally a couple of rate cuts ahead of some fiscal policy boosts from government in the second quarter of 2013 would have been the plan.
If various governments have the guts, they will do their bit in their next budgets by introducing some incentives to boost activity. The O’Farrell and Newman governments have done the right thing in switching first home owner support to new housing, but more may be needed, especially in NSW where there’s been, in effect, a government-induced housing construction recession for several years thanks to NSW Labor.
Not mentioned in yesterday’s statement was the fallout in the US from the so-called fiscal cliff from January 1 when, barring any deal by the old Congress, spending will be cut and taxes raised, which could plunge the US economy into a sharp and nasty slump. There’ll be some economic dislocation from the November elections as well.
It also means there will be another rate cut before the end of the year. This is not a one-off hit, but a program of action to spark the domestic economy well into next year. Yesterday’s rate cut and one more this year will provide a bit of a cushion for our economy, as the two cuts late last year did.
There was also only a passing mention of productivity yesterday by Stevens. “[S]ome continuing improvement in productivity performance” would be needed to keep inflation at bay. “Continuing” is an interesting word given the cries of productivity hysterics for months now — but we will have to wait a fortnight to see how it was discussed in the more extensive minutes. From the tone of the statement yesterday and the scenario painted (weakening demand for labour, slowing demand and a weaker-than-expected peak in the investment boom), boosting productivity now seems to be not as important as steadying and cushioning the level of demand in the economy.
Indeed, should the jobs market worsen and demand slow, but not come to a halt, productivity will improve on its own, but for the wrong reasons.