Joye assumes the Recessionberg position

Nobody sells it like Chris Joye:

So what we are thinking right now? Three core states of nature occupy my mind. The first involves some “known unknowns” around the trade war and Brexit. For whatever reason, one or both of these events blow up in a manner that materially undermines global growth. The RBA is forced to continue cutting towards its effective lower bound (ELB), which is either 0.50 per cent or 0.25 per cent. The RBA might think it is 0.25 per cent, but good luck getting pass-through from the banks…In this grim scenario, we get quantitative easing (QE) – initially by buying government bonds and then extended to all the assets the RBA currently accepts as collateral with the two main goals of putting downward pressure on the currency and reducing lenders’ funding costs, and ultimately domestic interest rates. The government will also be compelled to drop its surplus target and loosen fiscal policy.

A much more positive scenario, which is my central case, is one where local and global growth surprise on the upside in the next year as trade tensions dissipate, Brexit is sorted, and a combination of rate cuts around the world coupled with QE from both the ECB and Fed inject considerable new stimulus. The RBA still cuts to 0.5 per cent to try to hit its inflation and employment targets, and probably launches a slim-line version of government bond QE. Finally, ScoMo and JFry look like rock stars as they deliver large surpluses.

A middle ground, which is the next most likely contingency, is ongoing geo-political ructions stymying global and Australian growth, and making it hard for the RBA to get anywhere near its inflation and employment goals. It continues to cut, does limited government bond QE, and then runs a campaign to pressure the government to drop the surplus to support growth. Life could become very awkward for JFry.

I will take the middle ground with higher risk of the bad scenario. Especially in Australia which will suffer regardless of any global rebound owing to the reversion to mean for bulk commosity supply sides. For Australia it is best characterised as:

  • ongoing lousy
  • worse
  • worst

JFry has enjoyed an enormous bluff that his budget management was behind the surplus when it was ALL down to a Vale accident. That papered over huge economic forecasting errors with massive commodity revenues.

When the latter dries up, Recessionberg’s figleaf will crumble.

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