Finance Finance News RBA: The dog that didn’t bark – twice

RBA: The dog that didn’t bark – twice

Michael Pascoe in a car yard.
Car sales data shows the RBA's 'gentle turning point' may not be a turn at all. Photo: The New Daily
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If the Reserve Bank governor has found a “gentle turning point” in the economy, he hasn’t been looking in the nation’s car yards.

New vehicle sales were down 9.1 per cent last month compared with October 2018 sales, which were in turn down 5.3 per cent on October 2017.

The Federal Chamber of Automotive Industries (FCAI) noted this was the 19th consecutive month of sales being down on the previous corresponding month.

Year-to-date, sales are 8 per cent lower – and the “Camry in the car yard” has been an unfortunately reliable indicator of broader weak consumption.

Tuesday’s FCAI figures came top of Monday’s miserable retail sales statistics that showed Australians collectively bought less stuff over the first nine months of this year, despite our population growing by more than 1.6 per cent.

It points to the RBA’s “gentle turning point” being merely a euphemism for the economy remaining soft – a “gentle turn” isn’t much of a turn at all.

That will seem all the more obvious tomorrow when the RBA will  downgrade growth and inflation forecasts in its quarterly statement on monetary policy (SoMP).

The SoMP will complete an extraordinary eight days in the affairs of our central bank. In quick succession:

  • Last Friday Governor Philip Lowe effectively accepted being put back in his monetary box, promising not to talk about what the Federal Government should do to help the economy.
  • Coincidentally – or not – Treasurer Josh Frydenberg announced four days later that the 2016 agreement between the government and RBA would be rolled over unchanged. Normally, the agreement is speedily reviewed after an election, but this time it took the thick end of six months to decide to do nothing.
  • On Tuesday afternoon, the governor’s statement explaining the board’s decision to leave interest rates steady was remarkable for what it didn’t say. After featuring in each of the three previous monthly statements in trying to explain why wages growth was weak, this sentence disappeared: “Caps on wages growth are also affecting public-sector pay outcomes across the country.” 

    The dog didn’t bark, but unlike Sherlock Holmes’  ‘curious incident of the dog in the night-time’, the non-barking seems to be because it had been muzzled.

  • The dog also didn’t bark about the bank’s looming downgrade of inflation and economic growth expectations, but reading between the lines, you could hear a canine yelp as previous efforts to catch the “gentle turn” look like running into the pothole of weak consumption.

And there was a whimper that goes a long way towards explaining why there’s no change to the existing agreement with the Treasurer to include something stronger about the inflation target – it would be embarrassing as the bank has given up hope of reaching the bottom of the 2-to-3 per cent range as far out as it dare forecast.

Not that the governor is shouting about that as he continues to toe the Frydenberg line that Australian economy is motoring just fine on its way to the nirvana of a surplus budget.

“The outlook for the Australian economy is little changed from three months ago,” said Dr Lowe, repeating the mantra that interest rate and income tax cuts, spending on infrastructure, rising house prices and increases resources sector investor would deliver the promised land.

Reserve Bank governor Philip Lowe’s outlook for the economy has changed. Photo: AAP

But the RBA’s outlook for the economy has changed – it’s following in the footsteps of the International Monetary Fund in acknowledging our weaker performance.

The August SoMP forecast growth this year of 2.5 per cent. Now the RBA is saying 2.25 per cent.

Surprise, surprise – the smaller-than-headlined income tax cuts barely touched the cash registers in the face of reduced penalty rates, a lower threshold for HELP debt repayments, suppressed Australian Public Service wages, soft overall household disposable incomes movement and consumers realising interest rates are being cut because there’s something wrong with the economy.

Yet the bank is rather bravely sticking with its forecast of 2.75 per cent growth next year and “around” 3 per cent in 2021. The RBA’s forecasting track record has been nothing flash of late while it pushes its “glass half-full”.

The governor’s Tuesday statement itself provided grounds to doubt the forecast for next year, or to simply not believe the average citizen will feel any improvement.

The RBA expects the unemployment rate of stick around 5.25 per cent “before gradually declining to a little below 5 per cent in 2021”. That’s still a long way off the 4.5 per cent or less that the RBA now thinks is the non-accelerating inflation rate of unemployment.

It follows that the bank’s best hope for headline inflation is that it will be “close to” 2 per cent, as the key factor there is our weak wages growth resulting in weak consumption.

While dropping the public service wages reference, the governor did add a phrase about the wages impact – my commentary is in italics:

“Wages growth remains subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2-3 per cent target range.

Welcome indeed, but the RBA will no longer suggest how the government might help deliver that.

Meanwhile, business’ pay strike continues, the number of new private sector enterprise bargaining agreements being registered has collapsed and the government is talking about new industrial relations reforms to provide greater workforce “flexibility”.

A Centre for Future Work paper published last month highlights the plunge in enterprise agreements, particularly in the private sector.

Centre for Future Work senior economist Alison Pennington has compiled business lobbyists’ proposals for IR reform, finding that:

“Together they would constitute a thorough reorientation of Australia’s collective bargaining system.

“The end result would be a situation (very similar to the Work Choices regime of the late 2000s) whereby employers have unilateral power to determine terms and conditions, wages can be locked in for very long periods of time (contrary to employer’s calls for greater “flexibility”), and the scope for true workplace negotiations is compressed.”

So in the face of real wages growth continuing to stagnate at best and the government tightening fiscal policy as it chases the surplus Holy Grail, the RBA basically says we’re left to rely on four factors:

  1. Its weakening bias that foreshadows another interest rate cut to keep our dollar soft – and easier monetary policy from this low a base takes time to do not much other than inflate asset prices.
  2. Housing prices getting back to record territory (i.e. inflated asset prices) to re-ignite the wealth effect, generate higher sales volume and turn around slumping construction – which all takes time.
  3. Resources sector capital expenditure growing after years of shrinking.
  4. The east coast states continuing to increase their infrastructure spending.

Sometimes your dog might not bark but his body language and eyes can tell you plenty.

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