This week produced an intriguing twist in the “will they won’t they” story around a Reserve Bank interest rate cut. Since last year, we’ve been tracking the slow transition of a further rate cut from a remote chance, officially dismissed by the central bank to, now, a priced-in certainty for the markets and most economic commentators.
The timing of the cut vis-a-vis the election, of course, added a political dimension to the story — Scott Morrison and Josh Frydenberg can’t refer to a “strong economy” with a straight face if the RBA is cutting rates to stimulate growth, a kind of photo-negative replay of the bank’s rate hike during the 2007 campaign. All that was needed was a data trigger for the bank: in the words of the bank’s own board minutes, “where inflation did not move any higher and unemployment trended up”, an interest rate cut would be “appropriate” (and perhaps two, according to many economists).
Last week’s jobs data showed unemployment steady, though the historically strong growth of recent quarters appeared to weaken a bit. But this week’s CPI data was the plot twist — it not merely didn’t rise, it fell.
Inflation was 0% — completely flat — in the March quarter and down to an annual 1.3% from 1.8% in 2018, with the RBA’s preferred core measures falling to an average of 1.4% from 1.8% in 2018. Higher petrol and fuel prices this quarter will probably boost the CPI when reported in late July (to the probable delight of the RBA), but inflationary pressures are weakening in more and more areas of the economy — price pressure in the tradables, or import-exposed sector is now negative, with price pressures among non-tradables weakening to less than 2% on an annual measure. That means even a rise in the CPI in the June quarter won’t matter much except to statisticians.
So now the RBA board has to decide whether non-rising inflation and rising unemployment is the same as falling inflation and steady unemployment, for the purposes of monetary policy.
And there aren’t many sources of economic strength around currently. Infrastructure spending is strong but residential construction is weakening significantly. Our terms of trade continue to be supported by stronger iron ore prices and LNG exports are solid, but prices have weakened, coal prices are slipping, the drought has cut rural exports, inbound tourist travel has softened, car sales have fallen for nine months and retail sales have been hit by the housing and renovation downturn.
That’s not all — in a report this week on the March traffic figures from Sydney Airport, ratings group Moody’s said domestic passenger volumes fell 2% for the March quarter year on year after recording no growth over the 12 months to March 2019:
We believe that the decline in domestic passenger growth reflects softness in Australian consumer spending, with consumer sentiment possibly affected by the downturn in the local housing market; and aircraft optimisation by Australia’s two major domestic carriers, Qantas and Virgin.
And in a report earlier this month, S&P noted that among the risks facing Australian businesses was the lack of wages growth, which was behind the rise of “thrifty consumers” who were looking for ways to reduce their spending. S&P described consumer sentiment as “listless”and it warned that household consumption was likely to edge down because people simply did not have extra money to spend while the fall in house prices was encouraging people to lift their saving levels.
The next RBA board meeting is May 7. It will have the reworked economic forecasts for its second statement of monetary policy (SMP) for the year to be released three days later, which will almost certainly downgrade GDP and inflation estimates. The board may decide to wait until its June meeting to cut rates — it will have the April jobs data to consider then (plus the election result, though the government and Labor aren’t promising anything radically different in terms of short-term fiscal stimulus). But every month it waits, it risks further weakening of the economy.
If it does cut, the “listlessness” created by prolonged wage stagnation will have been a major cause. Given wage stagnation has been a deliberate policy of this government, there would be some justice if it had to spend the last days of the campaign trying to explain why the economy really was “strong” despite a new record-low RBA rate.