Lowe omits China

There’a another speech today by the RBA, with Deputy Governor Phil Lowe addressing CEDA on the forces driving the economy in the year ahead. It’s fairly run-of-the-mill stuff: structural adjustment, high exchange rate, mining boom, tradeables and housing weakness etc.

Two parts of the speech caught my eye. The first was the section on risks, which focussed entirely on Europe and the fallout from fiscal tightening in the US. Perhaps it is just that I’ve been writing on iron ore this morning, but I would have thought that China was worth a bit more than the below:

The Chinese economy is also continuing to grow solidly. The pace of growth has slowed, but it has done so in line with the authorities’ intentions. Inflation in China has also moderated. Across the rest of east Asia, the recent data have been mixed. Nevertheless, for the region as a whole, growth in 2012 is expected to be around trend, with domestic demand likely to play a more important role in generating growth than it has for most of the past two decades.

I’m a China bull in the long term but even I find this bizarrely short shrift if we’re discussing the prospects for the Australian economy in 2012. The RBA doesn’t really want to encourage further its already extreme “China bullish” reputation does it? I would have thought that even if the RBA sees China navigating its property bubble busting excersize well, some explanation as to why would be useful.

The second part of the speech worth mentioning was the section on inflation and the exchange rate:

One interesting aspect of the recent inflation data is the divergent trends in the prices of internationally traded items and the prices of goods and services that are not internationally traded (Graph 8). Over recent times, the prices of non-traded goods and services have been increasing at a fairly firm pace, although down markedly from the rates in 2007 and 2008. The overall CPI inflation rate has, however, been held down by a decline in the prices of tradable goods as a result of the exchange rate appreciation. But the prices of these goods are unlikely to continue to fall over the medium term, particularly as the effects of the exchange rate appreciation dissipate. As a result, some slowing in the rate of increase in the prices of non-tradables is likely to be required at some point for overall inflation to remain consistent with the mid-point of the target range.

While we cannot be sure that non-tradables inflation will moderate, there are reasonable prospects that it will do so. The Bank is expecting a modest pick-up in productivity growth over the period ahead from the low rates of recent years, as well as a slight moderation in wage growth. Together, these developments would help lessen cost pressures in the economy and thus see some slowing in the rate of nontradables inflation. In the event that they did not occur, it is likely that non-tradables inflation would be uncomfortably high.

I agree with this assessment of productivity, as I’ve written before. Even more so with the forecast of weaker wage pressures. Full speech below.


David Llewellyn-Smith
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  1. You seem to have ignored Westpac’s Phat Dragon report out yesterday, shows major indigestion in the Chinese banking system. As Steve Keen points out, the second derivative of lending is as important as the first, and what happened in January a major stamp on the brakes, intentional or not!

    “A week ago Phat Dragon was oozing calm in relation to what the
    January credit figures would say about the economy. Either an even
    1 trillion yuan would be disbursed (the consensus), which would
    been fine, or a larger number would print, which would mean that the
    turnaround in monetary policy, as expressed through bank lending,
    was unambiguously here. Having now seen the new lending figure – a
    genuine tiddler at just 738 billion – (if that were a hooked fish, you’d
    throw it back in disgust) that state of calm has rapidly evaporated.
    The last time that a January month produced a smaller nominal new
    lending flow was in 2007. The economy has expanded by 77% since
    that time. Unless new lending jumps sharply in February – and by
    sharply Phat Dragon means a lift beyond even the extravagances of
    2009 – then an annual loan supply north of 8 trillion yuan (and thus a
    total social financing provision that keeps pace with nominal GDP) is
    under serious threat. A huge problem with relying on that to happen
    is that February lending has exceeded January lending exactly …
    let me just count this on my talons , … exactly, … bear with me …
    – exactly never. If an appropriate credit supply is not forthcoming,
    downside risks to already decelerating aggregate demand will
    emerge swiftly. In sum, Phat Dragon will reconsider his baseline
    2012 forecasts if February loans do not break all sorts of records in
    addition to the Sinitic laws of seasonal motion.”

  2. Lowe may have omitted China, but he did not omit the carbon tax, expected to add .7% to headline inflation (more in McKibbin’s estimates, McKibbin arguing strongly that Treasury carbon price modelling is deeply flawed).

    Really is time for the postponement of this tax, the government knows, business knows, the bulk of the electorate knows it and yet onward we go. The price of power (pun intended).

    All cost no benefit. Except to those on benefits!