The economic debate and the role of the Reserve Bank in the federal election campaign have been changed markedly by what the Australian Bureau of Statistics referred to as “quite significant” revisions to data previously released on the level of building activity, following a major audit by the ABS of building activity data from the December 2012 quarter back to 2000.
The March release of the data yesterday pointed to dramatic revisions to data released in April for the December quarter. The ABS said:
“the total value of work done in Australia during December quarter 2012 has been revised upwards by $582.1m or 2.8%; the total value of work commenced in Australia during December quarter 2012 has been revised upwards by $1,790.9m or 8.8%. This was driven by revisions to non-residential commencements ($844.4m) and new other residential commencements ($621.5m); the number of dwelling unit commencements in the December quarter 2012 has been revised upwards by 3326 dwellings or 8.4%.”
So large are the revisions that they could actually lift growth in the quarter by 0.2% to 0.3% by some estimates (taking the quarterly GDP figure to 0.8 to 0.9%, compared to 0.6% originally reported) and the 2012 figure to around 3.3% to 3.4% (compared to the 3.1% reported in March).
Smaller revisions were also made to earlier quarters which could further lift annual growth estimates when the national accounts for the June quarter are released in early September. As well, the revisions for the September and December quarter could lift the annual growth rate in the 2013 financial year from the current 2.5%, to closer to the trend rate of around 3%.
The size and extent of the revisions up until December also tell us that it is quite likely the 1.8% fall in the value of building work for the March quarter reported yesterday will be revised upwards. For example in April the ABS reported that the value of building work done in the December quarter fell 0.1%, but yesterday that was revised upwards to a rise of 3.1%.
Some sceptics have been claiming that housing is continuing to do it tough. That position is no longer tenable in light of these revisions. And they have probably ended interest rate reductions from the Reserve Bank. And other data also released yesterday showed another fall in merchandise imports in June to a three-year low, which could see net exports making another solid contribution to June quarter growth, especially with iron ore exports doing better in volume terms in the quarter (according to BHP Billiton and Rio Tinto figures).
The revisions were released a day after the RBA issued the minutes of its July 2 meeting which made it clear the chances of another rate cut were becoming increasingly remote because the bank was starting to worry about what it termed the “substantial degree of monetary stimulus” already delivered to the economy with those cuts of 2% in the cash rate since late 2011, and the re-emergence of rising inflation as a concern for the central bank.
The appearance of the word “substantial” in the minutes showed the Reserve Bank’s changed thinking on the chances of another rate cut. Note also the elevation of the level of interest in the inflation rate (our emphasis):
“Given the exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place, members assessed the current stance of policy to be appropriate for the time being. The Board also judged that the inflation outlook, although slightly higher because of the exchange rate depreciation, could still provide some scope for further easing, should that be required to support demand.”
The word “substantial” was omitted from the post-July 2 meeting statement from Governor Glenn Stevens, and wasn’t used in the minutes of the June board meeting. It might sound small, but small things matter in the language of central bankers.
So, does the RBA now believe it has done enough to boost domestic economic activity, while the economy shifts from a resources investment boom to traditional domestic growth drivers like housing? It said this on housing:
“Members noted that conditions in the housing sector continued to improve gradually. Overall, dwelling investment was flat in the March quarter as continued growth in investment in new dwellings was offset by lower spending on alterations and additions. Forward-looking indicators for new construction continued to be favourable, with the number of building approvals increasing strongly in April and loan approvals rising noticeably over recent months, including for new dwellings.”
The latest ABS revisions will add to the bank’s belief than the “substantial monetary stimulus” is having its desired impact on housing and building activity.
And is the RBA more actively monitoring the future rate of inflation, given the cost pressures flowing from the (otherwise welcome) fall in the value of the dollar? The likes of higher oil and petrol prices and other rising import costs will feed through to the CPI in the June quarter report (to be released on July 24), and later.
It likely means the RBA is done cutting rates — meaning it won’t be a player in the coming election, unlike in 2007 when its rate rise wreaked havoc with John Howard’s claim that interest rates would always be lower under the Coalition. It also means that there’s no case for adding to demand through any loosening of fiscal policy, should the Rudd government be tempted to spend its way to victory. A rate cut will only happen if there’s a sharp slide in China or a major problem emerges in the US — say, a problem in the financial system or if the Fed mishandles its exit from its third round of easing.
Moreover, the return to a more traditional growth pattern and a dollar below parity should mean better tax revenue growth for whoever wins the election — although Treasury has been expecting more normal revenue growth to return for some years, and keeps being disappointed.
Against the easier fiscal environment, however, is the fact that the next RBA monetary policy move, even if a long way off, will most likely be up, not down. The Coalition might be wise not to repeat Howard’s claim during the coming election campaign.