Home builder grant
(Image: AAP/Dan Peled)

The Reserve Bank’s momentous monetary policy changes to be announced at 2.30pm can’t come too quickly as the global economy, led by Europe and the US, heads for deflation and recession thanks to the continuing rise in COVID-19 infections, a new round of lockdowns and the growing fears of political instability in the US after tonight’s election.

This is pretty much a perfect storm for Western economies — with the few “upside risks” (namely, the orderly replacement of Trump by Biden, a rapid vaccine, an end to lockdowns and the widespread fear of infection) still highly uncertain.

Domestically, it’s a very mixed bag at best for the economy.

Remember that the government’s forecasts for a pickup in growth this year and a return to <6% unemployment over the next three years are based on an ambitious “triple 7” set of targets this year: 7% or 7+% growth in household demand, housing construction and business investment.

Construction, fortunately, is looking brighter than feared a few months ago — thanks to the government’s support for first home buyers and renovations.

Building approval and housing finance data for September were the strongest since early 2019, with renovations up 11% (credit where due to Morrison and Frydenberg — HomeBuilder has proved a success despite the scepticism about its impact). And bank lending for homes is up double digits for many banks.

But overall, business investment is weak and showing no signs of recovering outside sections of the mining industry.

And the RBA and Treasury are already worried that the current post-lockdown strength in household demand won’t last heading into 2021.

Annual growth in retail sales has already fallen from 12.2% in the year to June to 5% currently. Coles, for example, saw a 10.7% rise in sales in the September quarter but that slowed to just over 6% in October.

Wage growth is at record lows and falling in some sectors — low inflation (even after the big rise in the September quarter) is the only thing keeping those low reading positive in real terms.

The RBA’s core inflation measures are running at 1.2% and lower on a quarterly basis. Stripping out the impact of childcare costs, higher petrol prices and rises in tobacco and alcohol excise changes, inflation fell in the September quarter and was also negative on an annual basis after the 0.3% drop in the year to June.

The final demand measure of producer prices rose 0.4% in the quarter, but fell 0.4% in the year — in fact they have been falling for all of 2020 (thanks to the impact of weak demand and COVID).

These are clear signs that price pressures are softening alarmingly. There’s more to come — after rising above US$40 a barrel in June and remaining above that for the next four months, oil prices have slumped — down 10% to 11% last week (and another 5-6% on Monday before a late bounce).

That will pull the CPI down in the current quarter, which is not what the RBA wants to see — especially given its new focus on the actual level of inflation and the need for inflation to be sustainably within its 2–3% target band.

There remain critics of the bank who think further easing of monetary policy will have little effect. There are also critics who oppose further easing either because they represent vested interests that want higher rates (think retirees) or because they’re ideologically opposed to easier monetary policy on principle, no matter what.

The argument that further easing won’t do much doesn’t cut it with the bank: it is determined to do everything it can to return to full employment and get inflation back up over 2% — sustainably over.

That’s why we should expect the bank to make one final cut to the cash rate today and take Australia into a new world of quantitative easing. Details at 2.30.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey

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