Yahoo Finance The RBA sounds slightly more upbeat – but it's not nearly party time
The Reserve Bank’s latest statement of monetary policy release on Friday had a rather upbeat tone that has been reflected somewhat by investors. And yet, it is actually a pretty dismal level of optimism. A decade on from the GFC, what constitutes an upbeat assessment is one that is rather depressing, and where the return to average growth is continually pushed off to a later date.
Less than a month ago the odds seemed pretty short that we would be seeing another interest rate cut to 0.5%; now the market predicts around only a 50% chance of that happening by May next year:
There is actually not a great deal of reasoning behind that change in outlook. Yes, there has been a pickup in housing lending, but credit growth remains very limp so the RBA would certainly not be worried at this stage about housing prices taking off.
Retail trade figures in September were awful and inflation growth also remains utterly moribund.
It is as though investors have just decided the Reserve Bank won’t cut rates any lower and will try other means – such as quantitative easing. Or perhaps they believe that next month’s mid-year fiscal and economic outlook (Myefo) might contain some stimulatory package that could offset the need for another cut.
That would be a logical response from the government, but given the government’s recent statements it is not a logical expectation.
At least the bond market is now suggesting better times ahead. The spread between the five year and two year Australian government bond yields went negative in March and then again in August. Such occasions in the past have been associated with future recessions.
But now the yield (or interest rate) for the five year bond is 0.10%pts higher than the two year bond.
That is good, but not exactly party time. The long-term average gap is 0.3%pts so the outlook remains pretty weak:
The rise in bond yields has also seen an improvement in the outlook for inflation. But again “improvement” is doing a lot of work – the expectation for inflation growth remains still very much below the RBA’s bottom target of 2%:
The RBA itself is also adopting a more positive tone.
In its latest statement on monetary policy released on Friday it headlined its domestic outlook: “Domestic growth is expected to strengthen”.
The “strengthening”, however, is not for a while. Yes, the RBA expects GDP and household consumption growth to improve but it only sees GDP growth reach 3% by June 2021:
And while you might think, oh well, good things come to those who wait, and at least the RBA has a positive outlook, it is worth recalling that in its November statement in 2018 its headline was: “Domestic GDP growth is expected to remain above trend over the forecast period.”
It didn’t.
In fact this year has seen a pretty significant decline in the outlook for GDP growth compared with last year:
This time last year the Reserve Bank was anticipating GDP to grow by 3.2% in the 12 months to June 2019 – it ended up being less than half that at just 1.4%.
So while it might be nice that the RBA now sees GDP growth getting back to above 3% by the end of 2021 – i.e. more than two years away – let us not treat it as a prediction set in stone.
Similarly, the RBA has downgraded its predictions for wages growth. Last year it hoped wages would be growing by 2.6% by the middle of next year. Now it expects just 2.3% growth beyond the end of 2021:
Given it sees core inflation increasing slightly, this means the RBA now does not see real wages growing by more than 0.5% any time before 2022:
The wages growth estimate places the RBA at great variance to the government. In the April budget the government predicted wages would be growing at 3.25% by June 2021 – the RBA expects just 2.3% growth.
It is likely the Myefo will see yet another reduction in the wages growth forecasts. This should be no shock – it has been the standard operating procedure for many years now:
Consider that in the 2015 budget the government predicted we would now have wages growing at 3.25%, rather than the current rate of 2.3%.
Underlying all of these predictions, both from the market and the RBA itself, is a bizarre reality that even with interest rates at record lows, there is no expectation of a return to average growth for another two years.
Two more years of tepid economic activity and an expectation the Reserve Bank will no longer cut rates but might have to undertake more extreme measures. And this is all based around the fact that there is little expectation the government will do anything other than talk up the importance of the budget surplus.
• Greg Jericho writes on economics for Guardian Australia
