The RBA has given us a subtle hint as to what they really think.
So I don’t expect a lot of cred for picking last week’s rate cut. A lot of people saw that one coming.
Where things get interesting though is what people think it means, or what it says about where the economies at, and what the RBA is likely to do with rates.
It can get tricky to get a read on what the RBA is thinking. They are very political with their words, and very careful not to say anything that might ‘excite’ markets.
It can be tricky to read through the boredom of it all.
For my money I like to keep an eye on their charts. The charts aren’t prone to the same kind of subjective confusion. (Is growth ‘solid’, or just ‘modest’?) The charts are also prepared by the economists closer to the data, so they way they set them up can give you a bit of an insight into what they’re really thinking.
And so with the chart-pack and SoMP that went with last weeks rate cuts now in our hands, let’s take a look at what the RBA really thinks.
(I might add my own extra-colourful commentary as a counter-weight to the RBA’s snooze fest.)
First up, looking at the global context, things look ball-tearingly good.
Global growth is slowing, but the RBA is keen to point out that our major trading partners (which is what really matters for Australia), have been steady tracking around 4% since the GFC. Nice.
Growth in China is slowing (though is still at creamy highs), but look out Mr Ming, here comes India.
And if you look at unemployment in the 3 biggest economic regions, it’s just heading into sunnier and sunnier pastures.
So the short of it is, the global economy is cheering Australia on like a rabid pies supporter. There’s nothing to complain about here.
Likewise on the domestic front. If you look at GDP growth, we’re growing at around 3%, which is slightly lower than long run averages, but everyone is growing a little slower these days. This is really about as much as we could hope for.
At the same time, inflation has become a total daisy-cutter. Again, this is a global phenomenon, and there’s was probably no avoiding it. It would be a problem if it heads too much lower, but for now, low and stable inflation is awesome. It helps businesses with their decisions, and it keeps interest rates low, so, you know, winner.
But that’s not to say we don’t have our challenges. These challenges are mostly around the mining boom that continues to deflate like a whoopee cushion. Mining profits have gone over the edge…
And CapEx (investment projections) are in free-fall as well…
It’s worth noting that the non-mining economy is holding ground, but that won’t be enough. Unless we get a sizeable pick-up somewhere else in the economy, the deflating mining sector could well drag us into recession.
There’s has been a lot of support from the building industry, though this has mostly come through the high-rise apartment boom, which seems to be coming off the boil now.
And there’s not a lot of hope for households coming roaring over the hill to save the day. Wages growth continues to fall, and is tracking around historic lows. The private sector panel is positively scary.
That kind of wage growth might be hard to square away with the unemployment rate, which is steady at a reasonably healthy level. If the labour market is pretty healthy, why are wages such a fart in an elevator?
It seems that what is happening is that the job market is churning, with higher paid jobs in mining and manufacturing being replaced by lower-paid jobs in household services. Less miners, more baristas.
The last point the RBA wanted to make was about interest rates. They note that official interest rates are steaming lower, but actual chalkboard interest rates are drifting down like a dreamy feather.
All because the banks are protecting their net interest margin (the difference between lending and borrowing rates, i.e profits) at all costs. They’ve hardly moved.
This will be complicating the RBA’s job, but actually probably makes things easier if anything. There’s always the danger of sparking another mining boom, so bank gouging will dampen that prospect.
So that’s the story. The global economy (occasional jitters aside), is actually very supportive for growth. And for the moment, the Australian economy is doing pretty well, growing strongly and generating jobs.
However, the transition from the mining boom remains a headache. Mining companies are a drag on investment and corporate profitability, and we’re shedding jobs in our productive sectors, though this is being slightly off-set in tertiary service sectors.
If these trends are left unchecked, then the growth outlook in 12 to 18 months starts to look a bit grim, especially if the Aussie dollar keeps drifting higher.
And that’s why we needed a rate cut. And why there’s a good chance we’ll see another one before the year is out.
That’s what the RBA really thinks.
Agree with their assessment? Are they too glass half empty or glass half full?