The AFR carries a couple of economic comments today from regular pundits, both of which are a bit gloomy. HSBC’s Paul Bloxham takes a break from his usual upbeat “rebalancing” thesis to assess emerging risks:
…for the first time in a number of years, the policymakers in charge of managing Australia’s economic cycle all have their settings moving in the same direction and the currency is also helping to support growth. Loose policy is important for Australia this year as the economy needs all the help it can get.
Indeed, growing the Australian economy is set to be much tougher in the coming year or two than it has been in recent years.
First, the booming mining sector, which had been a key driver of Australia’s growth, is set to slow significantly this year.
…Second, while we expect global growth to accelerate this year, it might be less helpful for Australia than previous global upswings. This is because the lift in global growth is expected to come from the advanced economies led by the United States, and we think this is unlikely to translate into a significant recovery in growth in Asia.
…As the mining boom comes to an end, policymakers and businesses need to focus on the other opportunities that the Asian century will present. The new government should concentrate on developing medium-term strategies to improve productivity and competitiveness.
Plans should also be made to improve Australia’s fiscal position in the medium term, but near-term fiscal austerity would be the wrong move. When the government announces its next set of plans in the May budget, it needs to be careful not to fall into the same trap as the previous administration did last year – tightening fiscal policy at the wrong time.
So! We need fiscal and monetary stimulus and improving competitiveness! That’s a little contradictory given low interest rates are blowing off land prices and preventing interest rates and the currency from falling. 88 cents is not low enough for the dollar. It’ll need to be in the low 70s for a decent period to persuade non-mining tradables that the “Australian moment” has passed.
We’ll get there (I will provide a 2014 dollar forecast tomorrow) but not soon enough unless the RBA gets more active with policy innovation, which Bloxo should be championing if he really wants to improve competitiveness and not just house prices.
That brings us to David Bassanese who reads the interest rate tea leaves right:
…has the economy been weak enough to justify an official interest rate cut at the Reserve Bank of Australia’s first policy meeting for 2014 early next month, or is the economy now showing sufficient strength to warrant higher interest rates by year end?
…The brightest spot in the economy remains the housing sector, with reports of good further gains in both housing finance and building approvals in recent weeks.
…My hunch is that these markets will self-correct – even before interest rates are increased – due to the already-high levels of household debt evident now compared with the mini-property bubble in 2003, and the lessons that buyers should have learnt from that frenzied episode. There are also questions over whether the lift in home-building – as distinct from just house prices – will be enough to support growth in the wake of the mining investment downturn. Given the very low level of home building, and Australia’s housing supply side restraints, I still have my doubts.
…Indeed, on a less optimistic note, recent indicators suggest the labour market continues to weaken…Even allowing for demographic trends, it’s fair to say the labour market is now as weak as at the height of the GFC. Accordingly, it’s premature to be contemplating interest rate increases and the bias on official interest rates remains to the downside.
A couple of points. Rate hikes are very long odds at this point (longer than markets are suggesting). The capex cliff is upon us later this year and will steepen in the second half. Housing construction won’t fill the gap. A modest consumption rebound will help but not enough with the weak labour market.
As China slows to 7% and below (and assuming it does not stimulate again) iron ore will correct and further pressure national income. The terms of trade (ToT) ease roughly 0.3% for each dollar that the iron ore price falls. If it trades at an average price of $110 this year then by itself that will be a ToT hit of over 7%, well north of the Budget’s forecast 5%, forcing further revenue downgrades and cuts.
Furthermore, if Bassanese is right and housing self-corrects, there’ll be nothing at all growing the economy and rates will immediately fall further. And yes, if no macroprudential policies are in place by then, housing investors could run again.
Both of these commentators are right to be cautious on the challenges Australia faces this year, but both underestimate how complex is that challenge and the critical need to step outside of conventional policy-making to fix it.
