Uncertain uncertainties. For an organisation that projects an aura of certainty, the Reserve Bank’s uncertainties about the economy have become, well, very uncertain of late — probably the most uncertain for years. The RBA’s quarterly Statement on Monetary Policy, the latest of which was released last Friday, contains its latest thinking on the economy and its immediate direction, with key forecasts on inflation and GDP growth. The small cuts to GDP growth and inflation in the new forecasts got publicity on Friday and at the weekend, as well as confirmation of the central bank’s newest easing bias (should one be needed), which is really a bone tossed to the “rate cut looms” worrywarts among economists and other analysts. But while there was talk about these points, no one mentioned the most striking qualification of many in the SMP — and one that hasn’t appeared in this document for some time, if at all:

“The forecasts are subject to a considerable degree of uncertainty. In part, this uncertainty relates to the assumptions that underlie the forecasts. For example, the forecasts are conditioned on a range of assumptions about the evolution of key variables, such as the exchange rate. Judgements are also made about how developments in one part of the economy will affect others.”

In fact it is quite rare for the central bank to confess to being so uncertain about the outlook for the economy. But despite this uncertainty, the tone of the SMP, like last week’s speech from governor Glenn Stevens, is quite positive about the economy and its transition. — Glenn Dyer

Take jobs. On employment, there’s a bit more clarity about what has been an unexpected bonus. One to two years ago the RBA was, like so many other forecasters and federal Treasury, gloomy about the outlook for employment, with fears the jobless rate could climb well beyond 7%. And yet that hasn’t happened. As the SMP explains:

“Employment growth is expected to be a bit stronger than had been forecast earlier. The labour force survey indicates that employment growth has been stronger than expected over the past year. This is partly because the sectoral composition of economic activity has provided more support to aggregate labour demand. In addition, the labour market has been more flexible than anticipated. In particular, wage growth has declined by more than had been expected and this appears to have helped employment to grow faster than otherwise. Leading indicators of labour demand, such as job advertisements and vacancies, have been on an upward trend and point to further employment growth over coming months.”

— Glenn Dyer

OECD cuts. It’s not just the RBA that is uncertain. The OECD has joined the IMF in cutting its economic forecasts for 2015 because of growing uncertainty about global trade and demand. There’s nothing new in that, as both organisations have a long history of optimism and reworking those high estimates lower as more data arrives. This time around the OECD (the Paris-based club of the 34 biggest economies) cut its forecast to 2.9% from 3.0% and 3.1% earlier this year (and 3.7% a year ago). In its latest twice-yearly Economic Outlook, the OECD projected a gradual strengthening of global growth in 2016 and 2017 to 3.3% and 3.6%, respectively.

The key to stronger growth, the OECD says (and it could be channelling the Reserve Bank), is the smooth rebalancing of activity in China and more investment in advanced economies. Economic growth in China is projected by the OECD to slow to 6.8% this year (which is about where it is now) and to continue to decline gradually, reaching 6.2% by 2017. The organisation said that global trade weakness — which it says is “deeply concerning” — could be a warning of slowing global GDP growth. But much of it is down to weaker demand from China for commodities, as we in Australia know only too well. Given this it’s no wonder the level of uncertainty has risen for the Reserve Bank. But it has to be said that the RBA’s cautious confidence the economy has been travelling well, but slower than normal has proven to be spot on so far, with the surprise on the upside the way the labour market has performed in ways not expected and, in fact, supportive for the wider economy’s transition. — Glenn Dyer

Peter Fray

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