Lunatic RBA leaps into “policy error”

Via the AFR comes the lunatic RBA’s latest propaganda spill:

…Reserve Bank of Australia Governor Philip Lowe is calling for solutions to a puzzle where employment is growing but GDP is softening.

But one of Australia’s more experienced economists, former ANZ chief economist Warren Hogan, said it was time for economists to consider employment data with more weight than GDP figures when determining the outlook.

…HSBC chief economist Paul Bloxham, who thinks interest rates are more likely to be lifted than cut, also supports the idea that strong employment numbers are a better indicator of economic direction than GDP figures.

Poppycock as usual. The lunatic RBA is more adept at bureaucratic arse covering than it is macroeconomics.

One reason why is its mates in the media, which very rarely hold it to account, hooked on their diet of special access and monetary policy leaks. At Domain is Ross Gittins:

Time for a reality check: why is it that the r-word strikes fear into the minds of ordinary people? Because they know that genuine recessions involve falling employment and rapidly rising unemployment. Businesses fail, people lose their jobs, and the rest of us fear we’ll be next.

Any sign of that happening? No. The reverse, in fact. Using the bureau’s “trend” (smoothed) figures, over the six months to December, employment increased by 175,000, with 87 per cent of the extra jobs being full-time, and the ratio of people aged 15 and over with jobs at a record 62.4 per cent.

…That’s how terrible a per capita recession is.

At the Herald Sun is Tezza McCrann:

Growth may have slowed in the second half of last year but we’re not seeing conditions go backwards in any significant or sustained way.

Thankfully, not all economic voices are so easily swayed. Shane Oliver destroyed the academic obfuscation with a single sentence at Domain:

He said there’s an 80 per cent chance of two rate cuts this year with a third cut a “50-50 proposition”.

According to Dr Oliver, the longer the Reserve Bank takes to move the greater the chance it will be forced into a third rate cut.

“The Reserve is focused on the jobs market but the unemployment rate is historically a lagging indicator and, as we’ve seen with the ANZ’s measure of job ads which has turned negative, unemployment might be about to start heading up,” he said.

UBS’ George Tharenou is equally perspicacious at The Australian:

“The disconnect between economic growth and jobs is just a simple lag, as it has always been.”

If so it could be risky for policy makers to wait for unemployment to start to rise before adjusting policy.

“The problem with that framework is that by the time unemployment rises, you’re probably already 12 months into an economic downturn,” Tharenou says.

Quite right. Expecting such complex data to match some procedural trend line is the very obtuseness that got us here in the first place. The data will align over time, resolved by the underlying driver’s of growth. That’s where sensible economic minds look to the broader context to create a narrative which offers insight into future trends. “Nowcasting” if you like. That narrative is painfully obvious:

• a house price crash is weakening consumption;
• a (so far) 30% crash in dwelling construction lies dead ahead;
• public investment has plateaued;
• private investment will very likely follow the first three.

That’s roughly three quarters of the economy entering a stall. Sure there are offsets in mass immigration, the offshore boom and public consumption. But it does not take Albert Einstein to see that in time the net balance of forces today will deliver fewer jobs and higher unemployment in the near future.

Yet even that does not cover the real kicker for the lunatic RBA and its scantily clad cheer leaders. The most important observation to make is that this is not in any way a typical end of cycle shock for Australia. Our external accounts are roaring and the stall is happening despite the cash rate being at record lows. The shock is an historically atypical housing bust born of many idiosyncratic headwinds that show no sign of abating: macroprudential; Hayne RC credit tightening; massive unaffordability; oversupply; peak debt; housing tax reform; BBSW stress; infrastructure lumpiness and Chinese capital outflow.

Any uncompromised risk assessment must conclude that dithering while a probable unemployment spike rolls towards tumbling house prices will threaten turning a cyclical correction into a structural adjustment that is more severe than it needs to be.

In the common tongue this is called “policy error”.