RBA did not bark, and that’s the point

The Weekend Australian - - BUSINESS REVIEW - ALAN KOHLER

Tues­day’s in­ter­est rate de­ci­sion and state­ment from the Re­serve Bank seemed un­re­mark­able.

The mar­kets glanced at it and moved on; there was a half­hearted at­tempt by some com­men­ta­tors to in­voke a small in­crease in “dovish­ness” on the part of the gov­er­nor, Philip Lowe, but it didn’t catch on and the story was soon over­whelmed by a 3 per cent drop on Wall Street that night, caused by a par­tial yield curve in­ver­sion in the US.

But ac­tu­ally, the RBA state­ment on Tues­day was as­ton­ish­ing, not for what it con­tained but for what it didn’t con­tain. Like the dog in the Sher­lock Holmes story, Sil­ver Blaze, the RBA didn’t bark.

Deputy gov­er­nor Guy De­belle had a bit of a woof on Thurs­day night in the Q&A af­ter his speech about the GFC to the Aus­tralian Busi­ness Economists’ din­ner, say­ing that “de­cent” falls in two cap­i­tal cities at once was un­charted ter­ri­tory and that rates could be cut if nec­es­sary.

But he also pointed out that the prop­erty cor­rec­tion was caused by a squeeze in the vol­ume of loans, not an in­crease in their price, so not the RBA’s ter­ri­tory.

But the for­mal state­ment on Tues­day looked both out of date and com­pla­cent.

They had seen the CoreLogic house price data for Novem­ber the day be­fore: Syd­ney down 1.4 per cent and Mel­bourne 1 per cent, the largest monthly falls in this cy­cle.

So 16 months into Syd­ney’s hous­ing cor­rec­tion and 12 months into Mel­bourne’s, the pace of de­cline for both cities is ac­cel­er­at­ing. Sep­a­rately, Perth val­ues are also back in se­ri­ous de­cline, hav­ing failed to even reg­is­ter an in­crease while Syd­ney and Mel­bourne were boom­ing.

The RBA’s re­sponse on Tues­day? “Con­di­tions in the Syd­ney and Mel­bourne hous­ing mar­kets have con­tin­ued to ease …” Wrong. For a start, 1.4 per cent in Syd­ney for the month is not an “ease” — it’s 16.8 per cent an­nu­alised, which is any­thing but. And se­condly, it’s an ac­cel­er­a­tion, not a con­tin­u­a­tion of eas­ing.

The fol­low­ing day, the RBA’s op­ti­mism was more de­ci­sively tor­pe­doed by the na­tional ac­counts.

An­nual growth was re­ported

to be 2.8 per cent, which sounds OK, just, but if we re­ported an­nu­alised quar­terly growth like most other coun­tries, the US and China for ex­am­ple, the 0.3 per cent for the Septem­ber would have been an­nounced as 1.2 per cent — not OK at all.

The pre­vi­ous day’s RBA state­ment had said: “The cen­tral sce­nario is for GDP growth to av­er­age around 3.5 per cent over this year and next …”

What’s more, of that mea­gre 0.3 per cent lift in GDP in the quar­ter, 0.35 per­cent­age points came from “pub­lic de­mand” and an­other 0.35 per­cent­age points from net ex­ports. And a lot of that in­crease in pub­lic de­mand is sim­ply a shift of ac­tiv­ity from the non­mea­sured work of help­ing dis­abled fam­ily mem­bers to the NDIS, which is in the GDP.

To be clear: a large amount of dis­abil­ity ser­vices are mov­ing into GDP for the first time.

The pri­vate do­mes­tic econ­omy — busi­ness in­vest­ment and con­sump­tion — has col­lapsed, and is in re­ces­sion.

That’s fur­ther re­in­forced by the 0.1 per cent de­cline in per capita GDP in the quar­ter.

And we may be only part-way through a long, and very big hous- ing cor­rec­tion that will fur­ther shrink con­sump­tion — through the wealth ef­fect — as well as busi­ness in­vest­ment — through de­clin­ing res­i­den­tial con­struc­tion.

There will be no re­ces­sion in Aus­tralia as long as China’s econ­omy holds up and state gov­ern­ments con­tinue to spend to catch up with pop­u­la­tion growth, but it’s cer­tainly not out of the ques­tion for there to be a sort of do­mes­tic re­ces­sion of in­vest­ment and con­sump­tion next year.

It de­pends on what hap­pens to the hous­ing mar­ket.

At this point, I should prob­a­bly make a con­fes­sion: I wrote a few times dur­ing the boom that I didn’t think it was a bub­ble that would re­sult in a big crash be­cause house prices were sup­ported by pop­u­la­tion growth and low in­ter­est rates.

That was, and re­mains, per­fectly true, but Syd­ney me­dian’s 1.4 per cent fall in the 16th month of the cor­rec­tion is start­ing to be sug­ges­tive of some­thing a bit on the bub­ble-ish side.

It’s true that Syd­ney prices rose 75 per cent and have fallen 10 per cent, so ev­ery­one’s still well ahead and shouldn’t com­plain too much, ex­cept for those who bought late, of which there are quite a few.

And if you think that’s it for the de­cline, you’re not pay­ing at­ten- tion (with the RBA) and se­cond, the rise is a dis­tant mem­ory, and the de­cline has its own im­pact on wealth and con­sumer spend­ing, no mat­ter what the rise that pre­ceded it was.

With any luck, I’ll be wrong again and there will now be a bounce in house prices across the na­tion, and they go back to be­com­ing un­af­ford­able.

But here’s the prob­lem: even if the RBA came over all “dovish” and, as a bil­low­ing group of economists are now pre­dict­ing, ac­tu­ally cut in­ter­est rates next year in an at­tempt to res­cue the hous­ing mar­ket and the do­mes­tic econ­omy, it prob­a­bly wouldn’t work.

That’s be­cause, as Guy De­belle said on Thurs­day, the cor­rec­tion has been brought on by an APRAin­duced credit squeeze, not a rate hike.

Ob­vi­ously, a rate cut next year — even a shift in RBA rhetoric to­wards an “eas­ing bias” — would be a big deal, and wouldn’t be lost on prop­erty buy­ers.

But would it pro­duce a for­est of raised arms at auc­tions? Un­likely.

The prob­lem is credit vol­ume, not price, and that’s in the hands of APRA, and, more to the point, Ken Hayne.

JOHN FEDER

Re­serve Bank deputy gov­er­nor Guy De­belle

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.