The Pascometer is burning red on a 50bps rate cut. It is interesting to look through the reasons why.
Unemployment remains low
I don’t take much notice of the headline seasonally-adjusted labour force figures, but the trend series shows the rate remains in the low 5s. Employment growth, though subdued, is still growth. We continue to create more jobs than we lose – it’s just that the lost jobs are loudly reported. Typical of our World’s Biggest Whingers mindset is that the budget forecast of 5.5 per cent unemployment next year received plenty of attention, but the forecast of 1.25 per cent employment growth was ignored. It means that even if the unemployment rate rises, there will be more people in work, earning more money, buying more stuff, than there are now.
In short, a higher proportion out folks out of work should be overlooked in favour of a higher aggregate figure, even though it would mean a much weaker economy.
It’s still early days in the capital investment boom
Bulk commodity prices will have their wobbles, but there’s more than a quarter of a trillion dollars set aside for projects that have either started or are committed to, let alone another quarter trillion for possibles. People in general can’t grasp just how big the capex thing is. The suggested full half-trillion project pipeline won’t all be built – we simply don’t have the people, machinery or infrastructure to be able to do it.
Similar bogus reasoning here. The aggregate amount of forecast business investment is irrelevant. What matters is the growth rate at which it is deployed each year. If it doesn’t grow a lot in the boom areas then it won’t offset the weakness elsewhere. If it shrinks at all, even from very high levels, growth falls, which is what matters.
Consumers are not on strike
They’re just spending differently and with a closer eye on value. Consumption spending has been holding up quite well, it’s just not correlated with retail sales numbers the way it used to be. Consumer confidence has been shaken a bit by all the scary European headlines and, to that extent, simply lowering interest rates a bit won’t make much difference – the RBA cutting rates won’t make the European suddenly solve their problems and go away.
Interest rates are, in part, meant to manage demand.
Yes, housing construction is flat or worse, housing prices ditto
Given the huge jump in housing prices over preceding years in most areas, the latter is not particularly surprising or bad – it gives affordability a chance to improve as incomes rise and thus very gently solve a problem that has been worrying the RBA for some time. Besides, the “average” house price figures often reported are warped by the falls suffered at the top of the market which really only concern people who had more money than they knew what to do with in the first place.
The flat housing construction performance is not good for a number of reasons, but it also frees up the tradesmen needed for the construction booms that are occurring closer to the resources action. If housing construction was strong in the south-east, there would be even greater problems in Queensland, WA and the Hunter Valley. The kerfuffle about Gina Rinehart’s guest workers would be all the greater.
House price falls are good so long as they are slow and the bank’s balance sheets are given time to adjust. We’ve just has the worst month of falls in the history of the RP Data series. Price drops may remain slow but maybe its wise to use what tools you have to ensure it.
Carbon price bogey has been overplayed
The fear campaign on the carbon price so heavily promoted by Tony Abbott will come and go soon enough, carrying with it money from Canberra to ease the worry. And we’re yet to see what impact there might be from Wayne Swan’s latest cash splash. If cash doesn’t do a little stimulating, the more subtle but blunt tool of interest rate cuts certainly won’t turn anything around quickly.
I agree with this but wonder what it says about Labor’s prospects that the Pascometer burns red on carbon pricing.
More workers, more consumers
We’re getting a lift from stronger population growth as we go from 1.4 per cent growth to something more like 1.6 per cent – those extra mouths and bodies do quiet wonders for demand across the board.
Only if they outweigh the falls in demand elsewhere.
The bond message
Those Commonwealth Bonds aren’t offering such a low yield because the market is betting on Australia falling over – it’s the safe-haven thing as money from places with real concerns wants to be parked in a nation that is fundamentally strong, has conservative fiscal and monetary policy regimes, is not dependent on the Euro and has not debased its currency by printing a pile more of it.
Maybe. But international bond traders are mostly buying Australian bonds because our weakening economy signals falling interest rates and they can make a small fortune on the coupon price as the yield tumbles. That is, they’re attracted to economic weakness not strength.
Absolute Chinese demand is not slowing
Chinese demand is not slowing, it’s just not accelerating as quickly as it used to and that’s a very good thing. RBA governor Glenn Stevens acknowledged in a speech last week that Chinese figures have been softer lately, but he specifically said the common reading of the HSBC purchasing managers index was wrong, that China’s manufacturing is not contracting.
He said it before the print of the official PMI which indicated that Chinese manufacturing is very close to contraction indeed.
Our world is not the US and Europe
It’s the emerging nations. Everything is still coupled, but the European problems are filtered through Asia before landing here and the emerging world is reaching critical mass in its own right. The constantly repeated claim that “Europe is China’s biggest export market” is only true if you don’t treat the emerging nations as a single market – they take more than double the exports China sends to Europe.
How are the BRICS doing? Brazil just printed o.2 quarterly GDP. India is growing the slowest in ten years. Russia is about to get hit by an oil shock. Not much succour here.
Nothing has really changed in Europe
Greece has always been on track to default at some stage, it’s just been a matter of how long it might be delayed. The real crisis of the impact on Spain and Italy is what should force the fiscal union that the euro needs to survive. If it doesn’t, there will be plenty of financial turmoil – but right now that’s a matter of speculation, not reality. The RBA is better off keeping its powder dry in case it’s really needed.
I’ll pay this point.
Canberra’s bi-partisan surplus fixation
Whadawewant? A surplus! Whendawewantit? Now! is going to retard domestic growth in 2012-13, sucking about half a percentage point out of GDP. Treasury secretary Martin Parkinson has rather disingenuously claimed that that is perfectly OK because the RBA is better at fine tuning the economy than Treasury. (And in the same speech he effectively admitted fiscal policy under the last few years of Peter Costello was second rate because it left the fine turning of the economy to the RBA – so it goes.) In any event, the RBA is likely to have to cut rates in the new financial year. The chorus demanding Glenn Stevens gets in his retaliation first wants the armoury denuded earlier than might be wise.
I wonder if the Pascometer has heard of Standard and Poors?
The stock market isn’t happy
But that isn’t something that should set monetary policy. Rates are likely to ease over the next while, which should highlight the gap between the yield on cash and what’s on offer from equities. Share prices are back where they were in November, but a half-smart investor should still be up by 5 or 6 or more per cent on a pre-tax basis thanks to the rich dividends on offer. That’s not the RBA’s problem.
The stock market is still a demand shock and in context it is signalling a big downshift in global growth.
Most of Pascoe’s points are simple falsehoods.
