Micheal Pascoe Sydney Morning Herald 16 October 2012
- Mining worries sparked last cash rate cut
- Mal Maiden: RBA in watch-and-wait mode
Looks like you could be safer betting on the horses rather than another interest rate cut from the Reserve Bank on Melbourne Cup day – the October board minutes paint a considerably more sanguine picture of the Australian economy than the market commentariat.
The longer perspective of the RBA continues to look through many of the passing headlines, offering some important and calming insights along the way.
The bank remains understandably concerned about what's happening beyond its influence in the wide world, but the softer local labour market is not a surprise, economic growth had been about what it should be, productivity is up and while the resources investment surge now looks like peaking a little earlier and lower, it means the subsequent decline should be more gradual “and resource investment as a share of GDP would likely remain at a high level for several years”.
The bottom line for the decision to cut rates earlier this month still was that the outlook for domestic economic growth had become weaker than previously forecast and, with inflation remaining low for the next year or two:
“Members concluded that the current assessment of the inflation outlook provided scope to adjust policy in response to the softer growth outlook. Therefore, at this meeting the Board judged that it was appropriate for the stance of monetary policy to be a little more accommodative, thereby providing some additional support to demand over the period ahead.”
Just “a little”.
The minutes note that the money market expects further rate cuts ahead, but the board's commentary doesn't lend a lot of support to that expectation, with the caveat of the global economy not deteriorating any further.
While considerable attention is given to the resources industry's outlook, it's non-resources construction that seems to concern the RBA more - “with the construction industry especially weak”, “softer demand for labour had been particularly pronounced in the construction industry” - and the low level of housing investment puzzles the RBA board as much as anyone:
“Dwelling investment remained at a low level in the June quarter, although there were signs of improving sentiment in the housing market more recently. Members noted that weak dwelling investment had been at odds with the fundamentals for housing demand, as evidenced by the relatively low vacancy rate, below-average mortgage rates and ongoing population growth. They observed that, in some areas, developers had difficulties selling new dwellings given their prices relative to existing dwellings.
“The improvement in sentiment in the housing market had been accompanied by an increase in dwelling prices in recent months. Household credit had been growing a little more slowly than household incomes, with members discussing the desire of households to pay down their debts ahead of schedule, helped by the reductions in borrowing rates.”
While the RBA certainly doesn't want housing prices to take off, it would like to see the industry doing more. That's where those with a vested interest or a billion jump in with demands for more and bigger interest rate cuts, but the minutes make an important point that is missed by the wider audience: the impact of the cuts we've already had are yet to fully flow through:
“Members agreed that it was too soon to see much, if any, of the effects of recent developments in bulk commodity markets on domestic economic activity. Likewise, it was too early to see the full effects of earlier reductions in interest rates."
That doesn't sound like a central bank hitting the monetary panic button the way it had to when the GFC struck.
Besides, the board makes clear that banks' competition for deposits had become their major funding issue, even though the banks' were successfully raising more money from the markets at lower spreads: “Domestically, members were briefed on the funding composition of Australian banks, with deposits accounting for 53 per cent of major banks' funding and likely to remain the key driver of funding costs in the near term.”
Elsewhere in the minutes, the RBA specifically looked through the recent volatility in retail sales numbers. Liaison with major retailers “suggested that retail sales were growing at around the pace seen prior to the recent household assistance payments” and sales of motor vehicles have been increasing strongly. (As subsequent motor vehicle sales figures have shown, that borders on understatement.)
And the minutes tip-toe into two areas of broader policy controversy.
At the end of comments about the softer labour market, the board notes that labour productivity across the economy had increased at an “above-average” pace over the past year. For all the carry on we've seen from the business lobby and the coalition about a productivity crisis (with the inference that it is all the fault of government industrial relations policy), it turns out we've been quietly getting on with it. Necessity will do that.
Secondly, it was just a passing mention, but these minutes include the fact that a good part of the weaker economic growth is government policy. Pick the line in this paragraph that tells us everything comes at a cost:
“Members noted that the labour market had been somewhat softer in recent months, although this was not inconsistent with earlier forecasts for the economy. Other recent data on economic activity had been broadly in line with earlier expectations about the pace of growth. Looking ahead, the forecast for GDP still anticipated mining investment making a significant contribution to growth in the coming quarters, with non-resource investment remaining weak, some possibility of an increase in dwelling investment, consumption growing broadly in line with incomes, and public demand subtracting from growth.”
It's just that final phrase about public demand subtracting from growth. The federal government's rush for a surplus and various state government's trying to trim deficits are actually the biggest drags on our economy. Non-resource investment remains weak, but it's the government sector that is subtracting from growth.
The federal budget papers showed Canberra's bi-partisan dash for surplus this financial year would subtract one per cent from GDP. The total public sector impact was estimated to be softened by state governments' deficits, with the bottom line public demand impact negative by half a per cent.
But that was before those various state governments started dramatically slashing at their employment numbers and other costs. We have governments putting their collective foot on the brake, forcing the RBA to keep its toe on the accelerator.
And the minutes also made passing mention of the board discussing the lower commodity prices' impact on tax receipts. Looks like the monetary mandarins are paying increasing attention to the fiscal fiefdom.