From Stephen Koukoulas this morning comes the RBA piece of the day:
The about face from the Reserve Bank is good news and is further evidence of its pragmatism and flexibility. When it gets it wrong, the bank has acknowledged its errors with sudden and often unexpected interest rate moves. In addition to yesterday’s rate cut, the easings in May and June were shocks to the market but reflected well on the RBA’s quest to do the right thing.
…The objective of easier monetary policy is to encourage private sector borrowing, investment and spending and discourage private sector saving. In isolation, this translates higher growth and higher inflation than would otherwise be the case. I would like to emphasise “in isolation” because the interest rate cuts, which now total 150 basis points since November 2011, have been delivered with the Reserve Bank giving consideration to a huge array of unfolding events and new information which point to generally weaker activity and downside risks
…After the dust settles from the recent global policy changes and now the Reserve Bank moving to a more accommodative monetary policy stance, the scenario for the Australia through to the end of 2013 is annual growth in real GDP bouncing around 3 per cent, plus or minus a few tenths of a per cent, underlying inflation (excluding the temporary effect of the carbon price) running in a 2 to 2.5 per cent band and the unemployment rate ticking up towards 5.5 per cent but probably not going much higher than this.
It is a near perfect economic scenario that will be enhanced if even easier monetary policy down the track can lift growth sufficiently to see the unemployment track back to 5 per cent or even a touch less.
The risks to the near perfect economic outlook are evenly balanced. On the upside, we could see a more favourable outlook for consumer spending and housing…The downside risks are linked to ongoing Australian dollar over-valuation, further caution from consumers and an even more aggressive fiscal easing.
The “Kouk” is largely known as a Labor guy so some of this has to be taken as rhetorical. But still, such optimism is highly questionable. The RBA is not cutting interest rates to these levels because we are entering economic nirvana. On the contrary, we are entering the end of the mining boom much earlier and at much lower levels than earlier assumed.
Take a look at the following recent charts from ANZ:
Because of the uncertainty over China, right now, there is a question mark over all of the projects in this chart that are not either under construction or committed. That leaves only the dark blue columns as certainties with the light blue as hopefuls. The RBA can see this and is cutting rates. I suspect by the second quarter business investment will be subtracting from growth. Take a hard look at what that might mean if China does not pick up. It involves a very quick slide in investment away from the peak. It is questionable, to say the least, that we’ll be able to offset it with borrowing and building houses (as much as we might try).
In the face of this challenge, sobriety is prudent.
