The US Federal Reserve and the Reserve Bank are in a similar position, judging by the Fed’s latest post-meeting statement early this morning and its economic forecasts (that’s if you exclude the $US85 billion a month in quantitative easing the US central bank will continue carrying out until 2015). And across the Tasman this morning, data emerged showing the NZ economy outperformed Australia’s in the final three months of 2012, expanding by 1.5% on the September quarter (Australia grew by 0.6%) and 2.5% (3.1% for Australia) over the year. But in Britain, judging from the new budget released overnight, the economy remains a basket case.
Ignoring the quantitative easing spending by the Fed, both it and the RBA are in watching mode as they assess how some significant easings in monetary policy (radical, in the case of the US) stimulate domestic demand; both see inflation well under control at the moment and are expecting solid, if unspectacular, levels of growth over the next year or so, and both see no need to ease current settings.
RBA deputy governor Phil Lowe made clear in his speech on Tuesday that the bank was watching how the 1.75 percentage points of easing since late 2011 was lifting economic activity. The big imponderable so far as Australia is concerned is how the economy will transition from the resources investment boom to a revival in domestic activity and demand.
In the US, the key question is the trade-off between improving unemployment and a still recovering economy, as outlined in the statement issued after the two-day meeting in Washington. But the economy itself is showing improvement:
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“Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.”
Apart from the huge spending program from the Fed, that statement could just about sum up the Australian economy at the moment, with some change of emphasis (investment slowing from record levels in our case, and a local housing sector still not showing strong signs of recovery, unlike America’s, which is surging).
“Despite all the tough talk on austerity, spending cuts, etc, the British government will borrow more (6 billion pounds, or $A9 billion), not less in the next 12 months, despite spending falling short in some departments in the year.”
And, when you look at the forecasts for the economy and inflation, both central banks’ forecasts are within cooee of each other. The Fed modestly lowered US GDP forecasts for this year but also said the job market would be healthier. The Fed sees the jobless rate falling to a range between 7.3% and 7.5% this year, compared with 7.7% in February. The Fed trimmed growth forecasts for 2013 to a range between 2.3% and 2.8% from the last estimate of 2.3% to 3%. The RBA is looking for growth in Australia to slow to around 2% to 3%, down from 3.1% in 2012. The Fed still sees growth above of 3% in 2014 and 2015 (the RBA is looking for a modest rebound next year).
And then there’s Britain, where despite attempts to placate worried voters (sorry, consumers) — the government has revealed a a home-buying boost and a 1% drop in company tax to 20% and softened tax rises on fuel and beer — the economy remains stuck in the very slow lane. In fact the contrast with Australia and the US is very telling. Britain’s 2013-14 budget and accompanying forecasts confirmed inflation will remain high, closer to 3%, (2.8% at the moment), growth forecasts for 2013 were halved to just 0.6% from 1.2% and 1.8% next year, down from 2%. That is growth forgone, never to be recovered. The UK economy has grown by just 0.7% since 2010 (Australia is up 7.3%).
Despite all the tough talk on austerity, spending cuts, etc, the British government will borrow more (6 billion pounds, or $A9 billion), not less in the next 12 months, despite spending falling short in some departments. Total borrowings over the next four years are projected to be 60 billion pounds (nearly $A90 billion), more than forecast late last year because of weak economic and revenue growth.
Even employment growth, one of the few bright spots for Britain, is showing signs of slowing. Official figures released hours before the budget showed 131,000 extra people in work in the three months to January, down from the 195,000 in the previous quarter and 427,000 over the year. Unemployment rose 7000 to 2.52 million, the first quarterly increase for a year and the highest since August. That left the unemployment rate steady on 7.8%, on par with the US and sharply higher than in Australia.