The graphs tell the story: the Reserve Bank today downgraded Australia’s economic outlook for the current financial year.
After real GDP growth peaked at 3.5 per cent in the year to the last March quarter, the RBA’s central forecast is that it will fall to just over 2 per cent in the year to March 31, 2015, and maybe pick up to 2.5 per cent by June 30.
And, after 11 months as Treasurer, Joe Hockey really is stretching to try to blame his predecessor for the year ahead. As sometimes might be called on the rugby field when a bomb has been put up, “Yours, Joe!”.
It was the RBA’s February monetary policy statement that first rang the bell on the much better economic growth Australia was experiencing last financial year. It was a statement and forecast the government studiously refused to acknowledge, as it didn’t suit the political narrative they were trying to build ahead of the budget.
Chances are, the government will try to ignore today’s statement as well. The RBA forecast of growth of a little more than 2 per cent in year to March doesn’t compare all that favourably with the ABS scorecard of GDP rocketing along, relatively, at 3.5 per cent in the year to last March.
The real GDP forecast is a very broad measure and falls well short of telling the full story of what’s happening within the economy, but the forecast growth certainly doesn’t lower the unemployment rate, among other things. And as the forecast improves, further out, so does the degree of uncertainty about it.
The RBA somewhat downplays the change in the graph since May, saying that the differences are well within the usual ranges of uncertainty for the forecast, but the reasons behind it include consumer spending softening and non-resources business investment refusing to come to the aid of the party. The level of fiscal consolidation promised in the state and federal budgets (as opposed to whatever the Senate does with it) continues to slow growth.
And, somewhat bemusingly, the optimistic view of GDP growth in 2016 getting back above trend is based on another aspect of the resources boom – LNG exports kicking in. That and housing construction remain the great hopes, assisted by an improvement in consumer spending based not on income growth, but the wealth effect.
Yes, the RBA is betting on house prices continuing to rise.
Despite the markets’ best efforts to get excited about the changed outlook, there’s nothing to suggest a change in policy. The forecast is made with the technical assumption that the cash rate and exchange rate stay where they are – and on that basis we’re supposed to be back on track in 2015.
In the RBA’s own words: “The available indicators suggest that GDP growth slowed to a more moderate pace in the June quarter. Exports appear to have declined, partly reflecting some payback from weather-related strength in the March quarter, while indicators of consumption, including retail sales growth and consumer confidence, were weak.
“Nonetheless, indicators of business conditions remained at around average levels, a timely measure of consumer sentiment has rebounded more recently and conditions in the housing market are consistent with further strong growth of dwelling investment.”
Regarding the RBA’s bugbear of a lack of animal spirits in non-mining business, “survey measures of business conditions and capacity utilisation are around their long-run average levels, although Bank liaison continues to report that firms are reluctant to invest until they see a sustained period of strong demand.”
Nonetheless, the bank still expects non-mining business investment to pick up to “around the average pace seen from the early 1990s up to the global financial crisis in response to the very low level of interest rates, strong population growth and the very subdued growth of the capital stock outside the resources sector over recent years.”
With growth falling this year and the delay between above trend growth and the labour market picking up, “the unemployment rate is likely to remain elevated for a time and is not expected to decline in a sustained way until 2016”.
And that’s what will keep inflation, and therefore interest rates, down. The wage price index over the past two years has been running at its lowest level in at least 15 years and is expected to pick up “only slightly” over the next two years, “remaining significantly below its decade average of 3.75 per cent”.
On the positive side for the economy (if you have a job), is that the RBA acknowledges the surge in productivity growth we’re witnessing:
“At the same time, productivity growth is expected to remain a bit above its average of the past decade, helping to keep overall labour cost pressures well contained. This sustained period of slow growth in labour costs should assist in an improvement in the international competitiveness of Australian firms, which will lend more support to labour demand than would otherwise be the case."
In passing, there seems to be a gentle down-playing of the impact on inflation of the carbon tax being ditched. The RBA statement notes it’s the Treasury’s forecast that ending the tax suggests a reduction in the headline CPI rate of 0.75 percentage points. It then goes on to say that the effect on underlying inflation might be more like 0.25 per cent and, anyway, “as was the case following the introduction of the carbon price, it will not be possible to identify the size and timing of the effects of the repeal of the carbon price amid the usual variation in consumer prices driven by other factors”.
As for that 0.75 effect on the headline CPI, the RBA mentions that the planned increase in tobacco excise will add about 0.25 percentage points to the CPI each year for three years – which neatly cancels out the carbon tax impact. The excise change makes no difference though to the underlying count the RBA cares about.
It hasn’t been a very good week for several cabinet ministers, whether it was Christopher Pyne suggesting women do teaching and nursing while men do law and dentistry, George Brandis' metamorphing metaphysical metadata, or Eric Abetz blaming someone else for falsely correlating abortion and breast cancer.
And Treasurer Joe Hockey hasn’t escaped either. The seasonally adjusted unemployment headline of 6.4 per cent was probably wrong, an exaggeration – the trend series number of 6.1 per cent makes more sense – but it’s still a figure the Treasurer has to take responsibility for. After being in government for 11 months, the RBA’s outlook and the soft employment market really can’t be blamed on Wayne Swan. It’s yours now, Joe.
Michael Pascoe is a BusinessDay contributing editor.