Confidence boost on the way?
Business and consumer confidence surveys and pensioners finding out what their next pay rise will be. The week ahead with Michael Pascoe.PT5M0S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-2rrcl 620 349 August 12, 2013
With the market tipsters almost unanimous in predicting the Reserve Bank will trim the cash rate by 25 points tomorrow, I wouldn't be surprised if they're right – but it seems I might be about the only person also not surprised if the RBA decides to sit pat instead.
The market betting so heavily on an RBA move does itself put some pressure on the board to deliver one, but it doesn't mean they have to and here's why: The two major economic changes since the last board meeting are negative for a rate cut. The Australian dollar has resumed easing, falling under the 90 US cent mark, and fiscal policy has turned stimulatory after a year of acting as a brake on the economy.
Today’s nearly flat June retail sales (trend growth of 0.1 per cent for the month, 0.9 for the quarter, 2.1 on the previous June) is a factor in favour of a cut and perhaps a touch lower than RBA expectations, given this line in last month’s board minutes:
“Retail sales were flat in April, though the Bank's liaison contacts suggested that sales rose modestly in May and June.”
Very modest indeed. But the minutes went on to note: “Measures of consumer sentiment were close to long-run averages, although consumers' concerns about unemployment had been high and increased in June.”
Yet last month’s rise in unemployment did not represent a change in the economic landscape – it was what the RBA has been expecting and is the inevitable albeit undesirable result of employment growth running at one per cent and working age population growth of about 1.8 per cent. It’s why rates have already been cut and why the government is letting the deficit run this year.
The headlines, particularly those running political causes, emphasise the rise in the unemployment rate, but businesses concerned about their potential customer base should be mindful that employment has continued to grow. There are more people in work with more money to spend than last quarter or last year; there are more potential customers out there if the value proposition is right to tempt them. Nonetheless, it is the public perception of a rising unemployment rate that is the reality when it comes to the impact on consumer confidence.
As for Governor Glenn Stevens’ speech last week, there was absolutely nothing new in it regards to monetary policy. It seems to have been a case of people reading into the speech what they wanted to hear, rather than what the governor carefully said.
This is where you might well say: “Hang on, the government has just announced a downgrading of economic growth and the deficit has blown out – the RBA has to act.” But Treasury downgrading its GDP growth forecast to 2.5 per cent just means it has caught up with the RBA's forecast of three months ago and Treasury and central bank are now both pushing in the same direction. (On Friday there's a fresh RBA quarterly statement on monetary policy when we'll find out if the mandarins have downgraded further or not.)
Last Friday's economic statement showed public final demand shrank by 1.5 percentage points in the past financial year compared with the budget papers' estimate of a 0.5 per cent fall. The new estimate for this financial year is public final demand growing by three-quarters of a per cent – fiscal policy is now expansionary instead of contractionary. For the past year, the government has been tapping the brakes while the central bank has been pushing down the accelerator. It was the previous fiscal contraction as much as the strong currency that was forcing the RBA to cut rates, but now both those factors are working with the bank.
The governor's Anika Foundation speech contained a great deal of interesting stuff, but as far as hints about tomorrow's meeting, it was the same old same old. The governor even stressed getting the wording right – the same as the last board meeting's minutes.
The speech was credited with helping the dollar fall through the psychological 90 US cent level even though, again, Stevens didn't say anything the RBA has not said before about the currency. Nonetheless, I imagine the bank would not be displeased with the exchange rate outcome. Aside from its blunt monetary instrument, it has only one other weapon: Glenn Stevens' jaw bone. If the jaw bone works, it can help conserve the interest rate lever.
And there's a less measurable factor to weigh: at the start of a month of electioneering with the polls saying it's a 50-50 bet, does anyone think trimming 25 points tomorrow would really make much difference to demand or confidence? It would barely be noticed. Even if you are a monetary dove wanting another rate cut or two from the RBA, you might consider it worth waiting until it will be noticed.
Michael Pascoe is a BusinessDay contributing editor.