My kingdom for a rational media. Today’s selection of economic commentary, from interest rates to the Budget and carbon taxes is so full of amphetamines that one is tempted to conclude that everyone is still high from last night’s Logies.
From the top, we have a piece from Alan Kohler that makes no economic sense:
The government’s ‘responsible’ strategy of returning the budget to surplus in 2012-13 is beginning to look irresponsible instead.
Getting from a near $50 billion deficit in 2011-12, which is what the leaks have been preparing us for in next week’s budget, to a surplus a year later would require a huge surge in growth and tax revenue over the next two years, which is not going to happen.
Treasurer Wayne Swan needs to dump the surplus promise as soon as possible; the alternative is either a nonsensical budget strategy or a damaging one, as spending is cut and taxes raised to meet a fabricated political target.
What’s changed is the currency. It is now virtually $US1.10 and there is a clear risk that it will go much higher over the next year or two, albeit with corrections along the way.
This represents a huge difference with the first leg of the mining boom between 2004 and 2007. Then, the average exchange rate was 78 US cents, which underpinned a $300 billion blowout in tax revenues versus budget forecasts.
…The Australian government should be planning for an exchange rate much higher than $US1.10 and that means lower GDP growth and less tax revenue.
In the circumstances, cutting spending and raising taxes to meet an artificial and unnecessary promise to report a surplus in 2012-13 would be incredibly irresponsible, especially at the same time as adding a carbon tax.
Can someone please explain to me how loosening the Budget will help here? All it will do is add to inflationary pressures and raise interest rates and the currency further.
Which brings us to Kohler’s stablemate and master of business hysteria, Robert Gottliebsen, who argues today that:
At the weekend the global chairman of Rio Tinto Jan du Plessis took up my theme in The Australian, declaring “I am not sure it is smart” to damage energy intensive exporters at a time when the rest of the world lead by China and the US does not appear prepared to move.
His declaration that it may not be “smart” was a clear understatement – it’s absolutely stupid. But the Rio chairman restrained his language because annoying the prime minister and her climate change minister may not in the best interests of Rio Tinto given that the company will survive the tax and is powering ahead with expansion. Du Plessis was really reflecting the widespread frustration of business.
… Most of the inefficient Australian manufacturers were swept aside years ago but the combination of a poorly constructed carbon tax, the higher dollar, bad industrial relations laws and the reluctance of young families to spend will prove lethal to many of those that have survived, which is increasing community nervousness in many sectors. And, on top of that, there is a danger of a big rise in minimum pay which will cause many restaurants and the like to axe staff in this environment.
For a start, Gotti led the charge against the RSPT, which would have saved much of the pain that these same manufacturers now face. Second, the carbon tax explicitly exempts trade exposed industries through rebates. Third, there is no danger of Australia getting ahead of the world on this issue. China is leading the world on energy-based carbon mitigation via diminished energy intensity. The US is lagging but is still using a lot of regulatory intervention, especially against dirty energy providers. Coal looks set to give was to gas in a major way. No, it hasn’t embraced a carbon price but so what? If it wants to diminish carbon output through much more expensive regulation, then that’s its choice. We don’t have to be so stupid.
Now, interest rates. Here we have a true surfeit of hysteria. First from Adam Carr:
While the RBA meeting this Tuesday (announcement at 1430) should, on paper a least, yield a rate rise, I suspect it won’t. It’s just too much of a mind shift for the RBA I reckon and even, perhaps, the broader market. I mean people talk as if the Australian economy was bordering on a recession – it’s a ‘two tier economy’, ‘the Australian dollar is crunching exports’ and things are ‘really tough outside of mining’. Even adverts that are run talk about how tough things are. I have never seen anything like it, truly remarkable stuff and totally detached from reality – unfortunately/fortunately there is not a lot of evidence to support these claims. As ridiculous as the debate has become though, it doesn’t mean it won’t weigh on the RBA board – it clearly has been which is why I think their fragile, eggshell minds will need time. Time to process these errors of thought, to slowly adapt and change.
Simply put, this is garbage. Go and read the Minutes on Monetary Policy Meeting. There is much more weakness than strength:
The extreme weather events across Queensland and elsewhere were complicating the interpretation of the economic data for the March quarter. While domestic demand appeared to be expanding at a solid pace, production in the quarter had been significantly affected by the natural disasters. In particular, liaison with the Queensland coal industry suggested that delays in removing water from the coal mines were leading to a slower recovery in coal production than had previously been expected.
The household sector continued to exhibit restraint in spending, with the household net saving ratio remaining around 10 per cent in the December quarter. Retail spending had recorded modest increases in the first two months of 2011, consistent with the staff’s liaison with retailers. Consumer sentiment had declined recently to be only modestly above long-run average levels. While there was considerable optimism among households about prospects for the broader economy, members noted that consumers were less positive about their own finances. Conditions in the housing market remained subdued, with housing prices down slightly over the first two months of the year and auction clearance rates a little below average. Consistent with this, growth in household credit had remained well below the average rate of recent years, and housing loan approvals had fallen in January and February. Residential building approvals had weakened in early 2011, with the fall concentrated in apartments, especially in Victoria, where there had been very strong growth in 2010.
The recent business indicators showed a somewhat mixed picture. Survey-based measures of current conditions were mostly around average, while forward-looking measures had picked up to be above average. Imports of capital goods had been trending up and business credit had risen in February, the first increase in nine months. Overall borrowing conditions remained tight, though liaison with larger businesses indicated that there had been some improvement in the availability of finance.
A strong pick-up in business investment remained the central element in the medium-term outlook. Members again discussed the very strong outlook for investment in the resources sector, particularly in gas. Members noted that a major challenge was whether the economy could accommodate the expected high rate of investment without undue pressure on costs. Outside the resources sector, growth in investment was expected to be relatively modest. The appreciation of the exchange rate was weighing on trade-exposed sectors such as tourism and manufacturing, and subdued consumer spending was affecting prospects for investment in the retail sector. In contrast, with office vacancy rates in the two largest cities projected to fall to quite low levels, a pick-up in commercial property construction was expected over the next couple of years from the current low levels.
Employment growth was estimated to have slowed from the rapid pace seen in the second half of 2010. The unemployment rate had, however, held steady at around 5 per cent, suggesting that the reported slowing in employment could be overstated. Forward-looking indicators pointed to a continuation of employment growth over the months ahead, but at a more moderate pace than seen last year.
There had been little new data on wages and inflation over the past month. Liaison with firms suggested that wage growth was increasing in mining-related industries and some skilled occupations, though pressures in the labour market had not become widespread. Recent data suggested that higher fruit, vegetable and petrol prices would significantly boost the CPI for the March quarter.
Slightly less high pitched analysis is available from Terry McCrann:
Interest rates are going up again. The Reserve Bank will make that very clear in its statement on Tuesday.
The first increase could come as early as next month.
Indeed, but for the surge in the value of the Australian dollar, the first increase could have – would have – come next Tuesday.
The dollar’s rise is like a rate increase as it reduces the price of imports and makes it tougher for local producers to put up prices.
Even so, arguably, the RBA should start raising rates next Tuesday as inflation is already above its target ceiling and we are on the threshold of the mother of all inflation-boosting resources booms.
Even with the impact of the strong dollar – the first “de facto” rate rise – the CPI (consumer price index) numbers showed last week that inflation had started to accelerate beyond the RBA’s comfort.
The “headline” increase in inflation was 1.6 per cent for the March quarter – a thumping 6.4 per cent annual rate and way above the RBA’s 3 per cent ceiling.
The RBA understands that was driven by special factors, especially the floods’ impact on food prices, but even the rise in petrol prices.
It is not going to raise rates to attack what are hopefully only temporary price rises.
It focuses on the “underlying” price rises; and it was those that rose by an higher-than-expected and worrying 0.85 per cent in the quarter. That’s 3.4 per cent annualised.
Again, the RBA could live with a temporary blip above 3 per cent. The trouble is, it is already clear this is more than that.
When you drill even deeper into the CPI numbers, the prices of too many things are starting to accelerate – despite the price-cutting impact of the strong dollar and the fact that consumers are saving more than they have done since the 1970s.
As I showed last week, the movements in the CPI were unsettlingly broad based and the RBA will definitely be tightening its finger on the trigger. However, you should bear in mind that:
…[the] CPI release was about three things. Housing and construction-related inflation. Oil-related inflation. And flood-related inflation. The RBA has said repeatedly that it will look through the last. The construction and utilities components of housing are competing directly with the boom sector for resources. But it is a chronic problem that is keeping the CPI base permanently higher rather than a sudden problem. On oil, they can’t do much but will nonetheless see it as a generally inflationary force across everything. There is some offset, however, in the fact that because consumption is weak, petrol prices are also going to be deflationary. As we’ve illustrated several times, there is a very strong correlation between consumer confidence and oil prices.
None of these data points cast any further light on the central question of labour costs, which is the one that will be bothering the RBA most.
The Stevens RBA has been clear that it is most closely focussed on managing the medium term commodity boom, so the question you need to ask yourself is: will they see it as necessary to further deflate the services economy now to offset the inflationary forces, such as they are, before more commodity investment pours in?
I other words, the RBA is not about to panic. It can wait until July for the June quarter CPI reading to see how the flood-related price rises are washing through. In the mean time, it will focus intently on forthcoming labour market releases, in the NAB survey and from the ABS. If it gets any sense of a broadening of wage pressures from these, it will hike earlier.
As for the string of rate rises McCrann sees in the second half, it’s way too early to call. Another rate rise by mid-year will add greater momentum to the housing slide, which is developing into a crash in Queensland and Perth. Without doubt, a series of rises would send the slide national, then employment will flatten out quickly. The RBA will be conscious of 30 year lows in borrowing by consumers.
We’re in an intense rebalancing. There will be winners and losers. Everyone should just calm down.