Reserve Bank Philip Lowe
Reserve Bank Governor Philip Lowe (Image: AAP/Dan Himbrechts)

The great Morrison stagnation is deepening — and it looks increasingly like the Reserve Bank, despite its own gloom about the economy, is reluctant to take further action to fix it.

Yesterday’s capital expenditure figures for the September quarter showed another fall, the third in a row, in business investment, with expenditure declining 0.2% in the quarter and 1.3% in the year to September, seasonally adjusted. Mining is the only area showing significant growth.

Earlier in the week, construction figures for the September quarter showed total construction falling 0.4%, bringing the fall in the 12 months to September to 7%. Residential building led the way with a 3.1% fall, seasonally adjusted.

That bodes ill for next Wednesday’s national accounts for the September quarter. Economists are already forecasting that weak retail sales, construction and investment data will wipe 0.7 percentage points off the result.

Which brings us to an unusual one-two strike by the Reserve Bank this week to signal its view of the economy and what needs to be done about it.

Deputy governor Guy Debelle went first on Tuesday morning, discussing employment and wages. The huge jobs growth of the last couple of years hasn’t been enough to make a dent in the unemployment rate, Debelle said, because participation — primarily of female and older workers — has increased more than anyone expected. One remarkable graph he used showed a near-vertical surge in the participation rate of female workers aged over 55.

This, and other factors like data from new enterprise bargaining agreements, was all in support of Debelle’s explanation of why wages were not going to rise any faster for the foreseeable future. “There is growing evidence to suggest that wage adjustments of two point something per cent have now become the norm in Australia, rather than the 3-4% wage increases that were the norm prior to 2012 … This supports the case that lower wage rises have become the new normal.”

That’s bad news for household spending and consumption (the biggest driver of growth in the economy) and especially retailing where growth is already sliding and jobs are being lost.

Governor Philip Lowe’s speech on Tuesday evening was highly anticipated as a guide to the Reserve Bank’s thinking on the possibility of quantitative easing (QE). It’s worth noting how extraordinary that last sentence would have seemed a year ago, when the RBA was predicting strong economic growth and indicating that the next movement in interest rates was going to be up to 1.75%. Now the cash rate is 0.75% and there’s still an expectation that the bank will go lower, if not in December then early next year.

Still, Lowe thought QE was unlikely, saying “the threshold for undertaking QE in Australia has not been reached, and I don’t expect it to be reached in the near future.” In Lowe’s view, the bank wouldn’t consider QE until the cash rate fell to 0.25%, at which point, “the interest rate paid on surplus balances at the Reserve Bank would already be at zero given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates.”

But Lowe then poured cold water on rates falling further. “Given the significant reductions in interest rates over the past six months and the long and variable lags, the board has seen it as appropriate to hold the cash rate steady as it assesses the growth momentum both here and elsewhere around the world.”

Lowe does expect growth to eventually pick up again — albeit “only gradually”. The bank “recognises the benefits that would come from faster progress, but it also recognises the limitations of monetary policy”. (Emphasis added.)

In that context, Lowe is wary of further rate cuts undermining growth. “Some analysts now talk about the ‘reversal interest rate’ – that is, the interest rate at which lower rates become contractionary, rather than expansionary,” although he also noted that “we are still a fair way from it”, which suggests that issue won’t be an impediment if the RBA decided economic conditions warrant another cut.

What would provide further stimulus if not QE? “The use of structural and fiscal policies will sometimes be the better approach [than QE],” the governor said. Indeed, “the willingness of a central bank to use its full range of policy instruments might create an inaction bias by other policymakers, either the prudential regulators or the fiscal authorities. If this were the case, it could lead to an over-reliance on monetary policy”.

Of course, the government already has an inaction bias. Its only spending lately has been the bring-forward of a small amount of infrastructure spending that will do little to offset the decline in construction, and an (entirely appropriate, if too small) increase in spending on home care packages, thus pumping still more money into the only booming sector in the economy, health and social care.

There was a three year period of no rate movements from August 2016 to June this year. It’s quite possible the RBA could sit on rates that long again, deep into 2022, waiting for growth to pick up — or the government to get its backside into gear.

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