Australian Monetary Policy is now on 'automatic pilot'.
Posted 02 October 19
The Reserve Bank of Australia (RBA) has lowered the cash rate to 0.75% pa. This is remarkable because only in December of last year the RBA stated that "the Australian economy is performing well" and the "outlook for the labour remains positive". The RBA now states that it "will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further". Also, that "the main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending".
This represents a stunning shift in the RBA's rhetoric in less than 12 months, particularly given the extent of rate cuts already delivered to stimulate the broader economy and that the economy has not thrown up any shocks or bumps in the intervening period. There is a worrying disconnect between their rhetoric, their analysis and the reality.
The RBA has attempted to 'jawbone' the economy into activity supported by the record lowering of the cash interest rate. Unlike the early 1990s when we emerged from recession with accommodative monetary policy and modest household debt, today we find a domestic economy suffocating under a gargantuan household debt load for which (traditional) monetary policy transmission has become completely ineffectual. The cynic would postulate that other forms of non-traditional monetary policy are heading our way very shortly and that the RBA is somewhat more prepared for non-traditional action than its rhetoric has suggested.
Watch-point #1 - Australian monetary policy is now on 'automatic pilot' to quantitative easing (QE). This will see the RBA enlarge its balance sheet and participate in bond buying to influence rate yields across crucial parts of the yield curve. At an extreme, it may see monetary policy combine with fiscal policy to stimulate domestic demand. We do not think that political policymakers in Canberra are yet up to speed or are in denial with where the economy is headed. Applying the Ben Bernanke analysis of monetary policy, we are very soon to reach the end of the road for traditional policy actions (Bernanke, Tokyo, Nov 2017).
What is the real picture?
What is the real picture?
i. Consumption & Savings
The weakness at the household level is compounding weak credit growth and in turn consumption. We think households will on balance have to start to draw down savings to ensure they have some prudent buffer. Presently, consumption is being supported by draw down of savings (exhibit 1). This continues to surprise us as both credit and income growth are constrained and the employment outcome is weakening.
Watch-point #2 - we view the shift by households to greater savings as a significant potential downward tipping point for consumption demand and likely pulling the economy into recession.
Watch-point #3 - the recently announced Federal Government enquiry into superannuation may see superannuation contributions become voluntary, even if for a period of time. This could be on the basis of anti-detriment to employees and would deliver an ongoing stimulus to household income, be a zero cost to business, have a minor cost to the Federal budget and be immediate. Were this to occur it would provide a major boost to domestic demand and the broader economy.
It is true that there has been some emergence of economic 'green shoots' (Cameron Harrison, Aug 2019). We see this in rising Sydney & Melbourne residential property prices and improved auction clearance rates. We would caution that we are in a supply-constrained property market and such thin volume is a weak market indicator. On a short-run curve, we consider it quite possible that established house prices might advance but ultimately the macro structural headwinds may prove too great to sustain growth in property prices. The deterioration in consumption demand and retail sales would be a very poor backdrop for residential property (exhibit 2).
Watch-point #4 - residential property prices beyond the short-run curve look precariously positioned against the backdrop of weakening consumption demand.
Capital City Prices and Retail Sales
As we have already noted, we remain surprised at the resilience of the household, particularly in the face of deteriorating employment outcomes and job security. At present, the public sector is doing the major lifting in job growth which is proving to be a vital buttress to weakness in private sector employment weakness (exhibit 3). The employment build at the National Disability Insurance Scheme (NDIS) has been a major jobs contributor together with profligate State Government employment. The NDIS employment build is now largely done and employment growth is likely to continue to come under pressure.
The employment landscape is seeing the blue collar sector (construction & trade-exposed sectors) being adversely impacted (exhibit 4). This is poor for per capita income and in turn consumption demand.
Watch-point #5 - unemployment worsens as private sector employment remains weak and public sector jobs growth wanes - this would likely see the economy tip into recession.
Public/Private Sector Employment Growth
Internet Job Ads, by Occupation
In Australia, we are not convinced that the RBA and Federal Government are properly aligned in the broader economic strategy ahead. The newly elected Government is yet to renew or restate its agreement with the RBA on its economic objectives.
The Australian domestic economic landscape is at an unfortunate once in our lifetime crossroad. Of course, there is a third dimension being the largely do-nothing scenario. Were this the case, a recession is probably inevitable followed by entrenched economic growth stagnancy and deflation risk, most noticeably in property prices.
What is likely is that the policy initiatives employed going forward are likely to reverse the commonly accepted economic views and practises employed for the last 80 years - basically the lifespan of the Western, modern, pluralistic economic system. The implications for inflation, interest rates and ultimately domestic demand and households is enormous, particularly given the household debt load.
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Peace of Mind Investing
Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.
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Photo by Joshua K. Jackson