From the above Wordle of today’s RBA Statement of Monetary Policy (SoMP), you get the impression that the bank is doing a little soul searching. “Growth” and “forecast” obviously feature more greatly than past favourites like “inflation”. And yes, the navel gazing has resulted in a downwards shift in bank forecasts. 2011/12 growth has been cut to 2.75% from 3.5% and 12/13 has been chopped from 3.5% to a range between 2.5% and 3.5%, suggesting rightly that there’s a broad range of risks abroad (or that the RBA is sick of copping it for its forecasts). Thence it is onwards and upwards to between 3% and 4% in 13/14.
In short, despite the soul searching, Futureboom is alive!
Yet despite this, the SoMP does read in a more balanced fashion. First, there is the hat tip to two speeds:
Over 2012 to date, partial indicators and liaison suggest that the economy has been growing modestly, but with activity continuing to vary significantly across industries. The mining sector remains exceptionally strong, with work progressing on the very large pipeline of committed projects and capital imports rising. Mining production, though, has been disrupted recently by adverse weather and industrial action.
Next it’s an assessment of weakness in housing:
Growth in household spending moderated at the end of 2011 and partial indicators suggest that it remained soft in early 2012. There has been very low growth in the value of retail sales in particular, though this has been weaker than overall consumption for some time. The housing market and residential building activity also remain weak. Demand for new housing finance has eased slightly in recent months, despite interest rate reductions late last year. There are tentative signs that dwelling prices have declined more gradually than was the case in late 2011, but to date the market for established dwellings has remained subdued. At this stage, the available forward-looking indicators suggest that a recovery in housing construction is unlikely in the near term. But with mortgage servicing costs falling relative to incomes, rental yields rising and ongoing population growth, some important conditions for a recovery in construction are in place. What remains is for buyers to reach a point where they have sufficient confidence to commit to contracts for construction of new dwellings, and for the supply side of the housing market to be responsive to demand. Under those conditions, a soundly based recovery in construction could be expected.
It’s something for the Bank to make this assessment, even if it’s wrong. Folks aren’t buying new homes owing to a lack of confidence. They’re not buying because the homes are being valued at less than the ticket price on them. That’s common sense.
Anyways, that may not ultimately be a bad thing. The overbuilds in QLD, WA and VIC might get absorbed a bit more quickly and maybe then some of the factors that the bank cites will kick in. But it sure as Hell won’t be in the short term.
Then the Bank moves on to employment:
Employment growth picked up a little in the March quarter of 2012, after the flat outcome in 2011. The softness over the past year includes the net effect of structural change, with mining and some service industries expanding, while firms in many other industries have reduced employment to contain costs and improve productivity in the face of modest growth in demand. Leading indicators, such as surveys and job vacancies, paint a mixed picture but are generally consistent with ongoing modest employment growth in the near term. A key issue over the next couple of years will be how effectively growing vacancies in some sectors can be filled with labour displaced from other areas.
Some study of what has gone wrong with ABS employment figures might have been useful here. At least an acknowledgement that we’re all kind of flying blind at the moment. Anyways, the final sentence is new and is something that MB has argued in the past. Labour is not as fungible as the Bank has previously supposed and it is good to see the idea creeping into its head. I don’t know exactly what happens to the “adjustment” if folks won’t move to the God forsaken wilderness of the North and we have to rely instead on indentured slaves from Asia, even as unemployment grows in the South. Perhaps the rise of a new political party with Bob Katter in charge? Nah…
Thankfully the Bank does see the risks that dimensions of the business cycle could overtake its labor force projections, which suggests strongly that it is still in the frame to cut if necessary:
In terms of risks on the domestic front, there is the possibility that in the near term, labour shedding across a range of industries outside of the mining sector accelerates as firms continue to adjust to the high exchange rate, weakness in the property market and the effects of weaker public demand. Over the medium term, however, as mining projects progress into the more labour-intensive phase of construction, there is a risk that labour demand could pick up more than forecast.
But as you can see, it is still equally freaked out by the prospect of labour-push inflation, which is fair enough, even if I’d underweight it versus the risk scenario. And that’s where we get to hangover from the 2007 inflation burst:
The outlook for inflation has also been revised down. Underlying inflation (excluding the effect of the carbon price) is forecast to stay close to recent rates over the next one to two years. The key features of this forecast are: a decline in domestically generated inflation pressure; at the same time, the decline in tradables prices observed recently diminishes, given that the exchange rate has been little changed for a year now and is assumed not to change in the forecast period. The decline in domestically generated inflation rests on a couple of important judgements: that growth of nominal wages will moderate somewhat in a period of soft labour market conditions, and that productivity growth picks up, as firms respond to heightened competitive pressures in an environment of subdued demand and the high exchange rate.
No worries then.
So, in sum, the oil tanker is turning slowly. The risky half of the great adjustment is gradually overtaking the growth half. The RBA still seems to expect that to reverse at some point but it’s certainly on the ready if it doesn’t. Which is, I suspect, what’s going to happen. More cuts a comin’.
