With another month’s labour force data showing another record number of Australians in the workforce and the unemployment rate back at 6.2%, it’s hard to make the argument that the economy is excessively weak.
But the release last week of the Q2 GDP data of 0.2% quarter-on-quarter and 2% year-on-year showed that when all the additions and subtractions are made to the economist method of calculating GDP, growth is far from strong.
So, until that circle is squared there is little prospect that the RBA would entertain raising rates.
Yet in his rebuttal of Paul Krugman and the doomsayers on the Australian economy, Peter Jolly, the NAB’s head of research, highlighted that the RBA normally hikes when business conditions are this strong.
“The headwinds the mining sector face are well understood but what is less well understood is that the non-mining economy is responding positively to the combination of low interest rates and a lower exchange rate,” Jolly said.
Jolly highlighted that the NAB’s proxy for the non-mining economy (red line, left-hand chart above) “grew at a 3.1% yoy pace to June 2015, above the 2% growth rate of the broader economy which was held back in Q2 by falling mining investment and weaker exports”.
What is also evident is that this non-mining proxy tracks business conditions well, Jolly said.
Thus, with the NAB’s August business survey showing conditions at the highest level in 6 years the right-hand chart shows that the RBA’s three tightening cycles this century would have occurred with business conditions at these types of levels.
There’s not much chance of that at the moment. But with markets still pricing the chance of an RBA cut, Jolly, and the NAB economics team’s message, is that it expects “the RBA to be on hold for some time before moving to lift rates from late next year”.
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