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Aug 6, 2013

RBA decision sets the economic parameters of campaign

If the RBA cuts rates today, it will reflect how little support the government has provided the economy via the budget -- a situation that's not about to change, write Glenn Dyer and Bernard Keane.


This afternoon, according to the overwhelming consensus of market forecasters, the Reserve Bank will cut the cash rate to a record low of 2.5%. If that eventuates, it will sum up the problematic nature of the economic underpinnings of  this campaign, as the RBA has been left alone to try to steady the economy as it makes the much talked-about transition from the mining investment boom to an old-fashioned, domestic-driven growth pattern and job generation.

The post-meeting statement from RBA governor Glenn Stevens and then Friday’s third RBA Statement of Monetary Policy for the year, which will contain new forecasts for growth, but not inflation, will underline how little government will be doing to help the RBA ease the economy in the difficult period of transition. Despite Prime Minister Kevin Rudd’s productivity improvement plan, the real need is help for the economy from an easier fiscal policy in the next year to 18 months.

There’s been little such help so far — indeed, the opposite. As the RBA cut rates and cut again through 2012, Labor’s fiscal policy instead was a 3.2% real cut in spending in 2012-13, the first cut of that size since the 1980s. Much of that cut involved shifting spending backwards and forwards to meet the Gillard government’s surplus goal (that goal began life under Rudd Mark I’s last budget, in May 2010), but it was still a significant fiscal contraction.

For a time it looked like this wouldn’t have too much impact, especially after former treasurer Wayne Swan (correctly) accepted humiliation rather than persist in trying to cut spending to match declining revenues last December; housing construction began picking up this year under the stimulus of the RBA’s rate cuts. But the risk was always that we were relying too heavily on monetary policy to take us beyond the peak of the mining investment boom. With the Treasury’s downgrade of growth forecasts and upgrade of unemployment forecasts on Friday, it appears that risk has been confirmed.

Fiscal policy will be a little easier this year: Treasurer Chris Bowen, following Swan, has also elected not to further cut spending this year or next and delayed the return to surplus by yet another year (fortunately Bowen has had little time to deploy colourful phrases like “come hell or high water”). Spending this year, helped by some delayed spending from 2013-13, will increase by a full 1% of GDP, though only back to about the level of 2011-12.

But even with interest rates at record lows and a lift in government spending, the economy is still below trend — and no longer just a little below trend, but at 2.5% growth.

But we can’t expect any help from the Coalition, which remains on its debt-is bad kick — helped by its megaphones at the News Corp papers and The Australian Financial Review. Shadow treasurer Joe Hockey has explicitly rejected the argument that he favours austerity, but the Coalition rhetoric continues to be about hacking into spending the moment it’s in government.

“The grown-up of the Coalition’s economic team, Hockey … has suggested rate cuts are a sign the economy has been mismanaged by Labor, while at the same time arguing Labor is spending too much.”

For the austeristas in the media and the opposition, this isn’t merely a matter of missing out on a bit of growth and a rise in unemployment (and, hey, some longer job queues never really hurt anyone, surely? They allowed business to hold down wages and undermine bolshie unions). If the economy stalls next year, as the RBA fears it might, and a Coalition government is hacking and slashing, then the return to surplus will be in the early years of the 2020s, not 2016-17. Higher unemployment, lower tax revenues and flat growth will all conspire to increase the deficit and lift debt, both in real terms and — as we’ve constantly seen in Greece — compared with GDP.

By the way, the grown-up of the Coalition’s economic team, Hockey, who admittedly faces the unenviable political task of arguing interest cuts under Labor are a bad thing (“interest rates will always be lower under a Coalition government”, etc etc), has suggested rate cuts are a sign the economy has been mismanaged by Labor, while at the same time arguing Labor is spending too much. Maybe, Joe — but both can’t be right, unless Labor has found some economically miraculous way of spending money so that it doesn’t end up in the economy.

Last week’s major speech from Stevens called ”Economic policy after the booms” contained rare references to the future direction of the dollar and interest rates:

“Interest rates are likely to be lower in such a world than they were in a world in which households were extending their finances. This is a global phenomenon, but it holds in Australia too. We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand. The recent inflation data do not appear to have shifted that assessment.”

While commentators took that as a signal that rates could very well be cut today (and could the bank cut by 0.50%?), what Stevens was saying is that the central bank sees the pace of growth being low (despite possible higher inflation from higher import costs from the weaker dollar) for some time to come. That view is despite the “substantial” monetary policy stimulus, as the bank’s July minutes put it, already administered to the economy by rate cuts since late 2011.

Stevens laid out what the economy after the boom will look like:

“The fact that consumption is likely to provide only a modest impetus to any acceleration in domestic demand suggests that other areas will be important… at least some of the conditions are in place for stronger trends in dwelling investment and, in time, non-resources business capital expenditure. And exports of resources will continue to pick up strongly. But successful ‘rotation’ of demand will probably also involve more net foreign demand for other Australian output of various kinds.”

In other words, exporters will have to boost activity and shipments, productivity will have to go on improving and housing construction and demand will have to pick up — not the prices of existing home sales. The Rudd productivity plan attempts to address this scenario, but is undermined by yesterday’s $200 million of handouts to the car industry, money that would have been better being applied in trying to kickstart a non-mining investment boom.

And while Rupert’s rags are calling for Labor to be thrown out, in the real “market” of opinion — the sharemarket — there are no such concerns. Since Rudd returned to the prime ministership on June 26, the ASX200 has risen by around 460 points, or 9.8%. Not exactly a vote of no-confidence — in fact, the market jumped 1.1% on Friday when the mini-budget and the tax rises and spending cuts were announced.

The earnings outlook in Australia is weak at the moment, as we will see with the first significant bout of June 30 (full-year and half-year reports) this week. But investors aren’t worried about the outlook for low, slow or no growth, not when there’s money to be made from low interest rates and the US Fed’s huge spending, even if they know and have accepted that that will start ending sooner than later.


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30 thoughts on “RBA decision sets the economic parameters of campaign

  1. Gavin Moodie

    If the Coalition wins government and cuts government spending as it promises, how will it explain away slower growth and higher unemployment in 12 to 18 months? It will blame Labor for a fiscal ‘mess’, of course, but the electorate allows an incoming government only 12 months of such excuses.

  2. Hamis Hill

    So the massive private mortgage debt hanging over from the Howard “Golden era” has no bearing on the RBA decisions?
    Just so we’ve got that right?
    Cue that cricket noise.

  3. Gavin Moodie

    Mortgagors have been using interest rate cuts to pay off their mortgages faster than they need to and I think I recall a report of Stevens saying that mortgagors’ debt was no longer such a worry.

  4. Observation

    So where will we look to so we get some stimulus into the economy? Looking at this very simplistically:
    Housing – The pricing of housing has blown out and has rendered the introduction of young people into the market almost impossible for most. We may need to wait for inflation of everything else to catch up to it.
    Mining – Well that is in a downward trend and is starting to land in an area of some sort of normality rather than the overheated monster it had become.
    Manufacturing – The world has been played so that the only real workable manufacturing set up is in developing countries and China. Germany seems to be the only exception to this rule.
    The stock market – It looks as though the lessons are finally being learned where investment into money to make money for making moneys sake becomes a cesspool of deregulated white collar robbery. With the low interest rates, not even the automated cash injection of our compulsory super fund will make much difference.
    Agriculture – It seems we are selling the farms and rural communities are shrinking by the day.
    Infrastructure building – The NBN has taken up most of the political will to take on any further projects such as rail, port, water collection or alternative energy.
    Austerity measures – Please someone tell me how this works.
    Government Investment in industry and projects – Who could we trust to do this logically and diligently?

  5. Gavin Moodie

    I suggest the most likely stimulus will be from households increasing domestic spending by keeping their mortgage repayments and saving stable.

  6. Frank Birchall

    I don’t know why you give Hockey such an easy run; the guy is economically illiterate, serially mendacious and deceptive, and very much one of the ‘whatever it takes’ brigade. If he’s ‘the grown-up of the Coalition’s economic team’, I’d hate to see the juveniles!

  7. Hamis Hill

    So using lower interest rates to pay down excessive mortgages which are consuming more than the prudent 25% of income will not cause a problem?
    So where are these payments solving the problem?
    There is still a shortage of income to be spent on supporting the retail sector.
    1.75 Trillion is the size of the private debt, increasing domestic spending looks rather hopeful.
    And it is all Hopeless Howard’s fault, what you get when a numberdunce junior suburban solicitor and high school debating “champion” gets its mitts on the levers of power.
    Massive, record interest rates as a Treasurer and selling his country into hock as a PM.
    Abbott will bring on a recession set up by Howard.
    The RBA has been struggling with this reality for the last six years, while the culprits have been languishing on the beach on full, not half, pay.

  8. Gavin Moodie

    I am happy to blame Howard for a lot that is wrong with government finances, but don’t understand how he is to blame for private housing debt. This seems to me due more to people wanting bigger houses – the so-called McMansions – in preference to more affordable houses, units and flats.

  9. Observation

    The negative gearing of investment housing I think started the ball rolling. Howard and Costello inflamed the problem with the first home buyers grant which practically increased the house price by that amount.

    Everyone was too happy to keep watching the housing prices scream upwards. Looking back now, I would have thought someone would have said hey guys this cant keep going like this. Now we have basically locked out the next generations from the housing market and I dont think it will get better unless it is over a long period of time where it all levels out again.

  10. Gavin Moodie

    I agree on negative gearing and the first home buyer’s grant and add that exempting the main residence from capital gains tax (1) inflates house prices, (2) narrows the tax base and (3) distorts investment decisions.

  11. Marty

    Gavin, if households maintain their savings levels and mortgage repayments, this won’t be a stimulus. It’s Keynes’s paradox of thrift in that these expenditures reduce the amount of money spent on consumption and, therefore, aggregate demand.

  12. Gavin Moodie

    I am suggesting that households may maintain their mortgage repayments and savings at their current amounts but that they may spend their income increases not on more savings nor on contributions to capital but on more consumer spending which would stimulate the economy.

  13. the duke

    so… we’ve had a further 25bp cut to the cash rate with a further one cut, some analysts are now saying 2, due before Christmas. The recent NAB business sentiment survey is negative, unemployment and budget deficits have been materially revised upwards and on average, we are having a leadership change every 2 years… if that isn’t enough to suggest that the incumbent government is not up to scratch, not sure what else you’d need.

  14. the duke

    by the way, what ever happened to the ALP unlocking commonwealth owned land to assist with pushing down residential home values?? Not that it bothers Rudd given his $100m fortune that his wife has built.

  15. David Hand

    Gavin, You’re in the wrong forum, mate.

    Down here in the Crikey Crypt, Howard is to blame for everything bad that has happened to anyone since 1975. His only salvation is that in Abbott, the urban elites have a new villain to focus on.

    At least the interest rate cut is seen as evidence of a problem, not good news, so that’s something. But households de-leveraging is not a bad thing. It may deliver lower growth for the next few years but it will eventually end and confidence in consumption will return, though as Glen Stevens said, not the debt-fuelled binge that occurred from 95 to 08.

  16. beachcomber

    Hockeynomics would destroy us.
    According to Joe, interest rate cuts are good. Unless it happens under Labor.
    Deficits are bad. Even in a Recession.
    Middle Class Welfare is bad. Only the Rich should get it.
    Treasury sucks. Only trust the figures that come from the people Joe pays to say that they are correct.
    Does the Coalition think that we really are so stupid that would believe anything that they say?

  17. David Allen

    So, according to Joe, should he become treasurer, we’ll be able to asses his successful economic management by how much he manages to cause [mortgage] interest rates to increase?

  18. the duke

    well, I’d rather Joe Hockey, and it is more than likely that the election will vindicate my wish, over whoever the treasurer is this month.

  19. MJPC

    I find it incomprehensible that Hockey should be bleating on about lower interest rates are a bad idea when bill and betty stringbag LNP voters are the aspirational contract workers who have gone out on a limb and signed up to +500K mortgages in the hope of low interest rates forever.
    Hockey better be wrong if the LNP wins, or there is going to be some gnashing of teeth in the burbs’ when the rates start to rise.
    The SMH today has graph showing rates rose under Howard from 4.75% to close to 7.25% and that the GFC caused a fall from 7.25% to 3.0%; adios McMansions come an LNP win.

  20. the duke

    i think a prudent home owner, who has purse constraints, would have locked in their interest expense given current fixed rates on offer. Luckily, Australians are amongst the best savers in the world (+10% of each pay) and 50% are in front of their mortgage repayments.

    luckily the incumbents aren’t as reckless as their cousins in the UK which were huge drivers of the GFC and forced a property crash and a considerable negative home equity dilemma.

  21. Frank Birchall

    MJPC, your comments are rational but the scenario is no problem for Joe — paraphrasing Beachcomber above, it’s all about ‘context’ you see; rising interest rates BAD under Labor GOOD under LNP because in the latter case it signals a rising economy, lower unemployment etc. In the former it spells soaring inflation, out-of-control spending, waste and mismanagement blah blah.

  22. the duke

    the ALP haven’t mismanaged our economy? wow!!

    the announcement of a reduced corporate tax rate will hopefully go some way to unlocking positive sentiment within the business and investment community.

    I’m not sure what chapter of economics 101 our current treasurer (forgot his name) is up to but he could do worse than heed economic direction from the coalition.

  23. Observation

    I keep watching Hockey. And there is nothing of any substance. Its all about what not to do. I am looking forward to some constructive economic ideas from him.

  24. michael r james

    Did anyone notice on QA last night that Warwick McKibbin was playing it pretty softly softly, for example avoiding overtly agreeing with Hockey (indeed carefully not mentioning Hockey despite Alberici’s leading questions; who can blame him? will we ever learn what lies behind BK’s bromance with Joe?). And he carefully corrected Alberici’s imputation that he worked for John Howard by saying that he was simply appointed to various independent bodies (RBA etc).

    Seems to me he is hedging his bets on the election outcome, eager to get back into the positions of power and influence. He was mightily displeased when Labor didn’t renew his position on the RBA board. Also seems like he is appalled at the econo-illiteracy of Joe and Tony.
    Speaking of McKibbin, in the context of BK’s statement ” unless Labor has found some economically miraculous way of spending money so that it doesn’t end up in the economy” this paragon of responsible economics wrote just last year in response to the high dollar conundrum:

    [If foreigners want to hold more Australian dollars in order to park these dollars in foreign exchange reserves and will not be using these dollars to buy Australian goods and services, then the best response is for the Reserve Bank to print more Australian dollars. These additional dollars should be sold to foreign central banks in return for foreign assets. The foreign assets would appear on the RBA balance sheet exactly balancing the increase in money supply. There would be no effect on the domestic economy from this global shock if the RBA undertook this transaction.]

    Sounds almost Whitlamesque, non? Alas the opportunity has passed. Too bad. This economic illiterate liked the sound of it.
    @Hamis Hill at 3:39 pm: +1

  25. the duke

    when the cash rate hit 3% during the GFC, Swan described it as being at an ’emergency level’.

    However, now it is at 2.50% and likely to be at 2.25% by Christmas, and then, 2.00% by February – if you agree with Bill Evans.

    No wonder the business community has no confidence in our current leadership.

  26. Hamis Hill

    Yes, the business community would prefer Malcolm Turnbull to the political progeny of John Howard and Bronwyn Bishop.
    As would most voters prefer a Business world A teamer over a Business B team in the rest of the conservatives.
    That is why they didn’t like Turnbull?
    Not an “insider”?
    The emergency that this level is set against is the towering Howard era private debt orgy.
    Doesn’t fell very good any more, does it.

  27. the duke

    @ Hamis – do you know that private debt has doubled since 2005? based on my calculation, that is 2 years under Howard with the balance under Rudd/Gillard/Rudd.

  28. Hamis Hill

    Nonsense Il Duce.
    Contradicts your earlier assertion about Australians being consumate savers in the same period.

  29. the duke

    yup, we are among the best savers in the world. Did you know that the top 40% income earners in Australia hold approximately 75% of household debt?

  30. michael r james

    Ha, in answer to my question #24 at 1:28 pm (“Did anyone notice on QA last night that Warwick McKibbin was…”), yes, it got special mention in today’s Cut & Paste (Oz):

    [Alberici: And just to clarify, you worked for the Howard government and John Howard himself installed you on the Reserve Bank board. Do your politics colour your views at all?

    McKibbin: Well, actually I’ve never worked for the Howard government. I was appointed by the prime minister … to a couple of independent committees but I was never employed by the Howard government. ]
    After yesterday’s (Wednesday) 100% unbalanced Commentary page in The Australian, they have done it again today. Five out of five articles, once again totally partisan. And once again one of the Abbott Tory women cheerleaders in a desperate attempt to give election-winning advice to their boy: “Tony, stop the slogans and treat all the folk out there like adults.” (A bit of unconscious Ruddism in there?)

    For the record, the 5 articles: 1. Greg Sheridan on PNG; 2. Sinclair Davidson of IPA on taxes (needless to say more); 3. Niki Savva; 4. Henry Ergas (needless to say more); 5. David Uren on budget promises (to be fair the only one pretending to be impartial).

    I’m wondering if the Commentary page could be brought to the ACCC as false advertising; it should really be called Tony Abbott Cheerleaders Club (authorized by Brian Loughnane).

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