Conventional wisdom, the RBA and market pricing says that rates are on hold for some time – the foreseeable future.
But in what has become a series of questioning public discussions, RBA governor Glenn Stevens last night entreated the “animal spirits” at work in the housing market to cross over into the rest of the economy.
It can also be observed that a bit more of the ‘animal spirits’ evident in the housing market would be welcome in some other sectors of the economy.
Stevens said that business needs to follow up its intentions to invest with actual intent and effectively wake up and recognise that – and increase in its own demand – is part of the increase in total demand.
Turning from housing investment to investment more generally, a more robust picture for capital spending outside mining would be part of a further strengthening of growth over time. Some of the key ingredients for this are in place. To date, there are some promising signs of stronger intentions, but not so much in the way of convincing evidence of actual commitment yet. That’s often the way it is at this point of the cycle. Firms wait for more evidence of stronger demand, but part of the stronger demand will come from them.
Give me those animal spirits!
As the above implied, it wasn’t Stevens’ most optimistic speech, although in harking back to his 2006, ’08, ’10 and other speeches, Stevens sought to reinforce the fact that Australia had actually navigated the GFC pretty well.
But what he also did was reinforce that because Australian household behavioural changes are not as linear as they have been in the past, the RBA’s forecasting capabilities have slipped anchor.
Of course he didn’t say that during the speech but the implications were many.
Most interesting was that the RBA continues to have singular focus on housing and the wealth effect as the driver of growth and as a driver of consumption, and associated falling savings rate, now that the mining investment boom has passed.
He said the RBA thinks this will continue but added he didn’t expect consumption to grow much faster than incomes going forward.
As I’ve argued in the past, however, we shouldn’t expect consumption to grow consistently and significantly faster than incomes like it did in the 1990s and early 2000s, given that the debt load is already substantial.
This is the huge structural change in the economy that is keeping animal spirits quiet, and is likely to do so for some time. Stevens’ comments highlight the debt reduction focus of Australian households, but also the reality that as wage increases stall Australia, retailers and businesses with a domestic consumer focus face a slow-growth future.
Now Stevens wasn’t being pessimistic about the future but, like the minutes to this month’s board meeting, it’s clear that the “headwinds” the RBA sees ahead are occupying more of their time.
It manifests in an outlook that will see rates in Australia on hold for the foreseeable future, but the RBA appears to be moving toward a bias ease rates.
That had become clear in the past month as it grapples with consumer caution and the resultant lack of business animal spirits.
Glenn Stevens’ speech last night suggests his concerns are growing.