It’s beginning to look like the Reserve Bank has declared war on the federal government.
First, the governor Philip Lowe tells the government twice in a matter of weeks that it needs to change its policy settings, and now assistant governor Luci Ellis has blown Josh Frydenberg’s budget out of the water.
Of course her speech on Wednesday night wasn’t framed in such warlike terms – it was actually a quiet, wonkish discussion titled Watching the Invisibles – but it contained a bombshell for our economic forecasting.
Dr Ellis formalised and extended what every galah in the economics pet shop already knew – unemployment will have to fall a good deal more and for years before we get something like the inflation rate the country needs to live happily ever after.
The RBA has previously admitted NAIRU (the non-accelerating inflation rate of unemployment) might start with a 4.
Dr Ellis fired off that the RBA has revised down its NAIRU target to 4.5 per cent and admitted that it might need to be yet lower.
“Over the past five years, wages growth has been slower than would have been expected based on past behaviour,” she said.
“We have therefore gradually revised down the estimate of the prevailing NAIRU from 5.25 per cent a few years ago to 4.5 per cent now.”
It’s a central bank aphorism that you can never know what NAIRU is until you’re past it.
Dr Ellis left the door well open to a lower figure: “Could we look back in a few years and realise that the NAIRU is even lower than we thought today? There’s no way to know for sure until we get there, but I can’t rule it out.”
Given that greater Sydney’s unemployment rate has been hovering around 4 per cent with no sign of a wages breakout, there’s a not unreasonable chance NAIRU begins with a 3.
Cutting through the economic jargon, what this all means is that it’s a good bet we won’t see the wages growth the budget depends on until unemployment falls another full percentage point.
It’s taken four years of strong employment growth and reasonably strong economic growth to lower the unemployment rate from 6.2 per cent to the current 5.2.
With consumption shrinking and the economy on track to have its weakest financial year since 1992, never mind the falling trend of global trade and whatever Donald Trump is up to, there’s not much chance of unemployment falling quickly.
Treasurer Frydenberg’s budget forecasts and projections promised that with a steady 5 per cent unemployment rate the wage price index would grow by 2.75 per cent in 2019-20, then hit 3.25 per cent in 2020-21 and a marvellous 3.5 per cent thereafter – which was meant to get CPI inflation back into the RBA’s target zone of 2 to 3 per cent in the new financial year and keep it there.
Given Dr Ellis’s announcement, there’s Buckley’s chance of that.
Instead, we’re stuck in what looks like a vicious cycle of sub-standard wages growth delivering sub-par inflation and a consumption recession that feeds back into sub-standard wages and so on.
And the government is offering no policy beyond the $1080 tax refunds to combat that cycle.
It’s reasonable then the post-election lift in consumer confidence and auction clearance rates proved brief.
There’s a partial explanation of that in the Westpac-Melbourne Institute June consumer confidence survey.
Coalition voters’ consumer sentiment improved by 7.5 points to an optimistic 118.8. Labor voters’ sentiment dropped by 9.9 to a pessimistic 91.7 – the same level as Greens voters and a bit below “others” at 93.2.