RBA Cheerleading Backfires
Far be it for me to sound downbeat on the Australian economy, but I’m far from convinced we’ve necessarily turned the corner and “better times are ahead”.
Of course, it’s fair to say there has been a smattering of better news regarding the economy of late, so much so that the Reserve Bank is feeling more confident expressing the view that official rates have hit rock bottom. According to the RBA, the next move in rates is likely to be up though the timing of this remains highly uncertain.
Why the optimism? For starters, employment growth remains healthy and the unemployment rate is no longer rising. According to surveys, business confidence also remains at above average levels. Economic growth rebounded by a reasonable 0.8% in the June quarter after a weather-affected miserly gain of 0.3% in the March quarter.
And perhaps the best single piece of good news in recent times has been the belated lift in non-mining business investment intentions in the latest quarterly survey of private capital expenditure. After making allowance for the usual gap between actual and expected investment at this stage of the financial year, the latest survey suggests non-mining investment will rise by around 8% in 2017-18.
So far so good. But here’s some less cheery news. Even that lift in non-mining investment is fairly modest, especially given mining investment is destined to slump a further 25% this financial year. Overall business investment will still fall, albeit perhaps not as much as evident in recent years.
What’s more, buried within the national accounts showing a heartening growth rebound in the June quarter was the fact that home building activity fell for the second quarter in a row. Recall that the March quarter fall in home building was blamed on poor weather delaying some high-rise construction projects and rebound was expected in the June quarter. It did not happen.
The value of building activity on new houses and apartment slipped by a further 0.8% in the June quarter after a slump of 3.2% in the March quarter. Overall dwelling investment only inched head 0.2% in the June quarter thanks to a chunky 2.2% rebound in spending on renovations.
Why the decline? It appears that while home building activity is still rising in the boom states of New South Wales and Victoria, it’s in serious retreat in Western Australia. Queensland appears to be going the same way, and even NSW is looking toppy.
The RBA has gradually backed away from its bullish outlook for housing activity and further downgrades seem likely. Indeed in the May Statement on Monetary Policy the RBA was still arguing dwelling investment would “continue to contribute to GDP growth over the next year or so, particularly given the large volume of new apartment construction in the pipeline.” Fast forward to the August Statement and the RBA is now saying the contribution to GDP growth from dwelling investment over its forecast period is expected to be “minimal”.
What the RBA has not yet countenanced is that dwelling activity might not just hold itself at a high level for some time, but might in fact start to retreat quite seriously. After all, the supply-demand fundamentals across the east coast are deteriorating by the day, especially already in Queensland.
Another vulnerability in the economy of course is the biggest factor of them all – consumer spending. Consumer spending grew by a reasonable 0.7% in the June quarter, even though household income growth was much weaker. In fact, income payments to households as revealed in the national accounts remain much weaker than that implied from the apparent growth in employment as reported in the monthly labour force survey – one reason might be we’re not getting the immigration inflows that the labour force survey tends to extrapolate from past trends.
As regards spending growth exceeding that of income growth, that’s only possible through further declines in the saving rate. Indeed, the household saving rate has virtually collapsed in the past few years as households have desperately attempted to keep up their usual spending habits even in the face of unusually weakness in incomes growth. This does not seem sustainable, but even if it did continue it is certainly not a healthy way to grow the economy.
Of course, the great hope is that the lift in employment growth will soon lead to a decent lift in wage growth which will bolster household finances. That seems like a pipe dream – certainly for the foreseeable future at least.
International evidence suggests even with tighter labour markets than Australia is enjoying at present, economies are having a hard time getting much of a lift in wage growth. There a clear structural reasons such as technology and globalisation – and we can add to this the growing casualisation of the workforce through the rise outsourcing and the “gig” economy.
All that said, the RBA appears caught in a bind. Given high household debt and falling savings, it is loath to boost the economy further through even lower interest rates. Instead it was resorted to cheerleading – talking up the economy’s prospects (perhaps more than is truly warranted) in the hope this might kick start a virtuous circle of animal spirits within the business community.
This may have some benefits, but one immediate consequence is that currency markets have been more confident in pushing up the $A to US 80c and leaving it at this disastrously uncompetitive level.
All up, I see the RBA’s 3% growth forecast for the economy over the next few years as still more a hope or aspiration than a serious attempt at realistically predicting the future.
David is one of Australia's leading economic and financial market analysts. His is Chief Economist with BetaShares, and an Economic Advisor to the National Institute for Economic and Industry Research (NIEIR). His has held former roles as senior commentator with The Australian Financial Review, Macquarie Bank interest rate strategist and Federal Treasury economist. He is also author of the online e-book, TheAustralian ETF Guide.