The RBA has just released their quarterly Statement on Monetary Policy (SoMP).
While many believe it is a notoriously backward looking document, it does offer the deepest dive available into what Australia’s central bankers are thinking about the local and global economies.
Here are the key takeaways from today’s document in the RBA’s own words (headlines are mine):
Housing and consumption
Household consumption appears to be growing moderately, reflecting the opposing forces of slow growth in incomes on the one hand and very low interest rates and strong increases in wealth on the other.
Consumption is expected to continue growing a little faster than income, which implies a further gradual decline in the saving ratio.
GDP – push me, pull you
The outlook for domestic growth has not changed from that presented in the August Statement. GDP growth is still expected to be below trend until mid 2015, before picking up gradually to be a bit above trend by the end of 2016. The key forces shaping the economy and the outlook are much as they were previously. The low level of interest rates and strong population growth are expected to continue to underpin rising housing activity and housing prices.
These, in turn, are expected to support consumption through their effect on household incomes and household wealth. In time, a pick-up in household demand should support higher business investment in the non-mining sector. Exports, especially of resources, are expected to continue to contribute to growth, while declining mining investment and, to a lesser extent, fiscal consolidation at both the state and federal levels are likely to weigh on growth over the forecast period.
Employment, not so good
A gradual strengthening of economic growth should, in time, lead to stronger growth of employment.
However, in the near term, with growth in economic activity forecast to remain below trend, the unemployment rate is likely to stay elevated.
Inflation is projected to remain consistent with the target over the forecast period. The depreciation of the exchange rate since early 2013 is expected to exert some further upward pressure on inflation over the next couple of years, but spare capacity in labour and product markets will continue to weigh on domestic inflationary pressures for some time.
Global economy, specifically China
Overall, the risks to the global economic outlook appear to be broadly balanced. A key risk is the condition of the Chinese property market, which has been a source of uncertainty for some time. The Chinese authorities had earlier been trying to engineer a slowing in the growth of property prices. Now that the market has turned down, some restrictions on purchasing have been removed in most cities and the authorities have acted to provide some support to purchasers and developers. It is too early to know how effective these efforts will be, or what implications the slowing in the Chinese property market may have for Chinese commodity demand, economic activity or financial stability.
Aussie dollar and the currency war
The path of the exchange rate is another significant source of uncertainty for the forecasts.
Notwithstanding the depreciation over recent months, the Australian dollar remains above most estimates of its fundamental value. A lower exchange rate would help to achieve more balanced growth in the economy. It would also put some temporary upward pressure on inflation. However, the recent announcements in Japan on monetary policy and pension fund asset allocation increase the probability of consequent capital flows seeking more attractive yields on various assets in Australia (along with other destinations). Such flows could hold the Australian dollar at a higher level than real economic fundamentals would imply.
The RBA also added:
Despite the recent depreciation of the exchange rate, the Australian dollar remains above most estimates of its fundamental value, particularly
given the further declines in key commodity prices over the course of this year. As a result, the exchange rate is offering less assistance than would normally
be expected in achieving balanced growth in th economy.
Domestically, an important source of uncertainty continues to be the speed and timing of the anticipated recovery in non-mining business
investment. While the recent data suggest that a substantial pick-up in non-mining investment is still some way off, the fundamental factors supporting
investment remain in place, including low interest rates, strong population growth, gradually rising capacity utilisation and a period of weak investment
over the past few years. If the appetite for businesses to take on risk improves, growth in non-mining business investment could eventually be stronger
Wishful thinking, and a little disappointment on a housing multiplier
While consumption appears to have been growing moderately, those states where the housing market has been especially strong have also seen stronger
growth in consumption and economic activity more generally over the past year. This suggests that consumption growth may pick up faster than
expected if property markets in other parts of the country strengthen. However, it is also possible that the increase in wealth from rising housing prices is
having less of an effect on consumption than has been the case previously. This would suggest that consumption growth might pick up by less, and the
saving ratio fall by less, than forecast.
The cash rate is sort of working
The cash rate has been unchanged at its current low level for over a year and interest rates paid by borrowers have declined slightly over this period.
The very low levels of interest rates are having the sorts of effects normally expected on the economy,contributing to a pick-up in the growth of non-mining
activity via strong growth in dwelling investment and providing support to growth in household expenditure more generally. Also, the conditions are in place for stronger growth in non-mining business investment.
Rates are staying low for a very long time
The very accommodative monetary policy settings will continue to provide support to demand and help growth to strengthen, in time. Meanwhile, inflation is expected to be consistent with the 2–3 per cent target over the next two years. Given that assessment, the Board’s judgement at its recent meetings has been that monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.
So there you have it – a lot of hope and expectation mixed up with the reality that the economic transition is happening more slowly and is more fragile than the RBA expected or hoped.