Yesterday the Pascometer redlined on hawkish monetary policy, suggesting a cut today. Whether that’s true or not, it’s pretty clear we’re headed for more.
For the case against today’s meeting, the international environment has improved since last month. The European recession is advancing but not so quickly that it represents an existentential threat to Australia. Like Delusional Economics, I see a zombification of Europe with little prospect for improvement in the foreseeable future but it’s no longer falling off a cliff. Peripheral market bond yields have risen but not so much given global yields have risen on large scale and wide spread central bank interventions. Local bank funding costs have continued to fall from last year’s nose bleed levels.
The US continues its nice run. Last night’s ISM was stronger than February, up 1 point to 53.4 – which, as warned, contradicted the regional indexes. The consumer is on a tear too with personal consumption spending in March up 0.8. Regular readers will know that my view is both of these will slow in the second half but they’re OK for now.
North Asia is also performing reasonably. China is clearly slowing but not alarmingly so at this point. Activity appears to have rebounded in some measure in March with decent electricity output growth. It has conflicting PMI results, one showing expansion the other contraction, but the wider North Asian economies – Japan, Korea and Taiwan – all recorded decent bounces in their manufacturing output and are all now expanding modestly.
More to the point, commodity prices have rebounded a little in March, with the RBA commodity price index up almost 2% on the month. This may also be the result of the 5% correction in the AUD. Iron ore is trading at the top of its new range suggesting good volumes. Coal, on the other hand, is weak in both price and volume with Gladstone Port shipments at 2009 levels in March. The sum of these factors, though, is certainly stabilisation in the exports half of the balance of trade, if not a small improvement.
Locally, there has been the a mix of data since the RBA told us at the last meeting that they’d need to see a “material” decline in demand to cut again. On the plus side, more indicators are suggesting housing prices have stabilised for now with the price melt easing and leading indicators like AFG confirming a modest up trend in mortgage issuance in March. The stock market is up 10% plus from last year’s lows. Online retail sales bounced in February.
However, there were four big data releases that showed weakness since the February meeting. The two confidence indexes for consumers and business both took a hit. The Westpac consumer sentiment index for March fell 5% and is in a down trend, although above last year’s deep low. The Roy Morgan measures are similar. Business confidence fell in the February NAB Survey, as did its important employment measure, though trading conditions jumped. The broader employment market showed weakness in the official measure, rising 1% to 5.2% but that is within the recent range. The broader Roy Morgan measure rebounded but also remained weak. On the other hand, both the ANZ and DEEWR job vacancy indexes showed signs of bottoming. My view remains that higher unemployment is coming but the writing is not yet on the wall.
The big release since the February meeting was the Dec quarter national accounts which showed a lousy 0.4 growth rate for the quarter and below trend growth for the year at 2.3%. Both Dutch disease and the disleveraging inhibited investment in the tradable and old housing/consumption sectors. Dwelling investment especially hit growth, down 3.9% in the quarter. The HIA and ABS have since shown only a small rebound in dwelling sales and approvals.
Here’s what the RBA said in the last meeting:
With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy remained appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy. The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation.
Bill Evans wrote recently that the condition of demand “weakening materially” has been met. I’m not so sure. The weakness in dwelling construction has been telegraphed for many months and the RBA is well aware of it. Yet, following the GDP release, Glenn Stevens also said in a speech in Hong Kong that:
Monetary policy can play a role in supporting demand to the extent that inflation performance provides scope to do so…Overall recent economic performance in Australia is not too bad… but neither is it so good that it cannot be improved. The full range of policies – macroeconomic and structural – need to play their part in seeking that improvement.
Structural adjustment has been the RBA’s mantra for two years. To my mind, the trend growth that is possible during the adjustment from consumption-led growth to mining-led growth is clearly lower than it was before hand. The RBA seems to be waking to this fact. In theory, that leaves enough capacity available to contain inflation which, in turn, enables demand management.
If I were the RBA, I’d cut today. But it’s not yet clear how far the bank tansitioned on these questions so we may have to wait.
